Direct Line, the UK's second-largest motor insurance group with about 1,000 employees in Scotland, has rejected a £3.1 billion takeover offer from a European rival saying it "significantly undervalued" the business.

The rebuttal came after Belgium's Ageas said on Wednesday that it was in the "preliminary stages" of considering a bid for the Kent-based firm, which has been hit by sluggish profits and payouts to customers after discovering it had breached fair pricing rules. Profitability across the sector has also been hampered by higher prices for used cars, more expensive parts, and longer repair times.

Ageas said its proposal was for a cash and share offer that would pay 233p per Direct Line share, 43% more than Tuesday’s closing price. The deal would have involved Direct Line shareholders receiving 100p a share in cash and one newly issued Ageas share for every 25 Direct Line shares they own.

READ MORE: Hit to profits drives Direct Line to hike cost of insurance

Direct Line confirmed that on January 19 it received a "highly conditional, non-binding indicative proposal" from Ageas.

"The board considered the proposal with its advisers and considered it to be uncertain, unattractive, and that it significantly undervalued Direct Line Group and its future prospects while also being highly opportunistic in nature," the company said. "Accordingly, the board unanimously rejected the proposal on 29 January 2024.

"The board is confident in Direct Line Group's standalone prospects given its strong strategic position, powerful brands, and robust capital position.

"Adam Winslow will take up the role as CEO on 1 March. He is tasked with refreshing the strategy and operational focus of the group with the clear objective of returning to a sustainable level of operating profit over time."

READ MORE: Car insurance costs skyrocketing in UK as inflation hits 43%

In September the group posted an operating loss of £78.1 million for the first six months of 2023, compared with a profit of £197m for the same period in 2022. Pre-tax losses in the first half also ballooned to £76.3m, compared with an £11m loss the previous year.

That followed the announcement in July that the company had agreed to repay £30m after discovering it had charged existing customers more than new ones for car and home insurance policies.

Mr Winslow, the former head of Aviva UK, will take over as Direct Line’s chief executive next week. He replaces Penny James, who stepped down last year.

Direct Line - which also owns the Churchill, Privilege, and Green Flag brands, among others - was part of the Royal Bank of Scotland before floating as an independent business on the London Stock Exchange in October 2012. The vast majority of the company's Scottish staff are employed out of Direct Line House in Glasgow's Cadogan Street.