LONDON (Reuters) ?- UK insurer Wellington Underwriting Plc said yesterday that it is in talks to be taken over by Bermuda-based rival Catlin Group Ltd, sparking hopes of a deal that could create a major player in the Lloyd?s of London insurance market.

Shares in Wellington closed up nearly 17 percent at 113- pence while Catlin shares closed up 2.2 percent at 497- pence, valuing them at around ?553 million ($1.03 billion) and ?814 million respectively, according to Reuters data.

?The board confirms that it is in discussions with Catlin Group Limited which may or may not lead to a cash and shares offer being made for the company,? Wellington said in a statement.

The company, which has also been considering moving its holcing company to Bermuda, said that discussions were continuing and the board would update shareholders in due course, but said the business plan for the enlarged group would have to be likely to deliver greater value to shareholders than Wellington?s standalone plans.

Shares in other Lloyd?s businesses were also pushed up on hopes a deal could spark a wave of M&A in the insurance market, with Chaucer Underwriting and Hiscox shares both closing up over two percent, while shares in Atrium Underwriting closed up over five percent and Kiln shares surged nearly seven percent.

?The potential for cost savings is fairly significant,? said Seymour Pierce analyst Gerald Farr.

?There is likely to be a big overlap in terms of the two top lines but I don?t think that either of them is a big enough player for a merger of the two to mean an automatic loss of business,? Farr said.

Wellington would be an attractive target for Catlin for a number of reasons, analysts said, principally because it has well-established businesses in the United States, where Catlin is only beginning to develop a presence.

A deal, which could create the largest syndicate within Lloyd?s, would also give Catlin greater power to set the price and terms for many of the risks it underwrites.

But an agreement would have to overcome a couple of hurdles, analysts said.

The deal would only be likely to proceed if the Wellington board were to recommend a deal to its shareholders, Farr said. In the past, deals involving two Lloyd?s insurers were considered to be too hard to complete because of clashes between rival star underwriters around which businesses in the market are traditionally centred.

Also, the fact that Wellington, unlike Catlin, does not own all the capital backing its syndicate would be a sticking point.

It?s very likely that any deal to buy Wellington would be conditional on buying out the individual investors, known as Names, who provide around a third of the underwriting capacity for Wellington?s syndicate, analysts said.

Wellington has been regarded as a possible takeover target since it was pushed to a 2005 pretax loss on the back of heavy claims from the string of US hurricanes.

The company, whose shares have underperformed the FTSE non-life insurers index by 18 percent since the end of March, responded by cutting its exposure to major hurricanes while buying more reinsurance to protect itself against another catastrophe like Hurricane Katrina.

But as reinsurance prices have soared in the wake of the disasters, the additional cost of buying extra cover for itself pushed Wellington?s interim profits down, along with foreign exchange losses caused by the weak dollar.