Wellington Underwriting has confirmed that it is in discussions with fellow Lloyd's insurer Catlin over a possible takeover bid.
Insurance Times revealed earlier this month that the company had finally been put on the market after years of speculation.
Wellington was forced to admit on Tuesday that it had received a takeover approach from Catlin after its share price shot up by 8%.
The insurer told the London Stock Exchange that talks "may or may not lead to a cash and shares offer being made for the company".
It added: "The Board will need to be satisfied, inter alia, that the business plan for the enlarged group is likely to deliver greater value to Wellington shareholders than Wellington's standalone strategic plans.
"In the absence of an offer which satisfies this requirement, Wellington will continue to work towards the delivery of its stated strategic objectives as set out in its interim results for the six months ended 30 June 2006."
Discussions between the parties are said to be ongoing, but, at the time of going to press Catlin had not confirmed its firm intention to make an offer.