LONDON (Bloomberg) — Novae Group Plc, a Lloyd's of London insurer, said it approached the chairman of Chaucer Holdings Plc to discuss a possible merger.

Novae made the statement after Chaucer earlier climbed 13 percent, the most in three months, following an announcement from Chaucer that it had received an unsolicited merger proposal. The potential all-share offer, which would be on a "nil-premium basis", is subject to "a number of conditions, and there can be no certainty that the approach will result in an offer being made", Chaucer said in the statement.

"This is very good news for shareholders" of Chaucer, said Rakshit Ranjan, a London-based analyst at Noble & Co. Ltd. who has a "sell" rating on the stock. "If there isn't a takeover then Chaucer will have to raise capital to fund its expansion. Given that capital markets are tough these days, an M&A arrangement is not an expensive way out."

Meanwhile, Chaucer said it will raise £75 million ($107 million) to fund growth.

The insurer is offering about 17 million shares to investors at 40 pence apiece, 15 percent less than their closing price on Tuesday.

Chaucer said it's raising funds to meet increased capital requirements at Lloyd's and to fund new business growth. The share sale will allow the insurer to increase its underwriting capacity at one of its main Lloyd¿s syndicates by 22 percent to £545 million ($775 million), the company said.

Fellow Lloyd's insurers Amlin Plc and Bermuda-based Hiscox Plc have increased their underwriting capacity to benefit from higher demand for insurance after American International Group Inc. was forced to accept a US government bailout and last year's hurricane season was the most costly since Hurricane Katrina in 2005.

Novae has a market value of £239 million and Chaucer's market capitalisation is £164 million. Peter Rigby, a spokesman for Chaucer, and Nick Miles, who represents Novae, declined to give further details on the proposed merger.