QBE Insurance Group, Australia's biggest insurer by premium income, said on Tuesday smaller rival Insurance Australia Group had rejected a A$7.3 billion ($6.8 billion) takeover proposal.
IAG said that QBE's proposed takeover offer price was totally inadequate. IAG shares surged more than 14 percent after the announcement. QBE said the proposed deal would have led to pretax cost savings of about A$300 million by 2010.
"QBE decided to explore the merger with IAG prior to pursuing other opportunities in various parts of the world. QBE is committed to its proven strategy of growth and its focus on profitability, a strategy that has worked well over a long time," QBE said in a statement.
QBE said it had offered 0.142 of its own shares and A$0.70 in cash for every IAG share. IAG shares were 11 percent higher at A$4.29, after jumping as much as 14 percent to A$4.41. QBE slipped 1.5 percent to A$22.85.
IAG has been cited as a possible acquisition target for QBE ever since IAG's share price starting sliding last year following profit declines and as its UK expansion plans failed to live up to market expectations.
QBE, which earns about two-third of its premiums from overseas, has largely grown through acquisitions, having completed some 110 purchases in 25 years.