Royal & Sun Alliance, Britain's biggest general insurer, yesterday confirmed it was in talks about a potential offer for Guardian Royal Exchange (GRE), its smaller rival which put itself up for sale in November.

Royal & Sun Alliance said it had discussed offering about 390p per GRE share, valuing the group at £3.4 billion sterling (€4.9 billion). GRE shares yesterday rose 4 per cent, from 354 1/2p sterling to 369 1/2p, giving the group a market capitalisation of just under £3.3 billion.

However, the Royal & Sun Alliance announcement was given a cool reception by analysts, who believe the prospective bidder's founding £6 billion merger in 1996 between Royal Insurance and Sun Alliance was mismanaged. Its shares fell 5 per cent, from 488p to 465p.

GRE has refused to grant Royal & Sun exclusive negotiating rights and several other insurers remain involved in the talks, including AXA of France and Eureko, a European alliance of seven insurers. Any offer from Royal & Sun would be a mixture of cash and its own shares, probably 50-50, but the company sought to calm City concerns by ruling out making a rights issue.

The combination of Royal & Sun and GRE would raise competition issues in Britain, where it would have close to 25 per cent of the general insurance market. The enlarged group would have more than 30 per cent of the Irish general insurance market, and would have to make disposals.

Royal & Sun would seek job and cost reductions if it acquired GRE, which has 17,500 employees. Having shed 5,000 jobs following its 1996 merger, Royal & Sun said recently it would cut more jobs and withdraw from certain areas of business. Most of the cuts are expected in its general insurance business in Britain, which employs about 22,000 people out of a total of 43,000 worldwide.

Advisers to GRE, which has promised to make a decision by the end of this month, are concerned that City hostility could force Royal & Sun not to proceed - leaving the group vulnerable to a lower bid from Axa.