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UPDATE 5-RBS hits milestone with Direct Line listing

* RBS sells 30 pct of Direct Line at 175p per share

* Raises $1.3 bln from sale of 450 mln shares

* Retail investors take up 15 percent of offer

* Shares trading 7 percent above IPO price

(Adds analyst comment)

By Matt Scuffham and Kylie MacLellan

LONDON, Oct 11 (Reuters) - Insurer Direct Line made a solid stock market debut on Thursday, marking a milestone in parent Royal Bank of Scotland's (RBS) recovery efforts.

Strong demand from the general public helped RBS raise 787 million pounds ($1.3 billion) through the sale of almost one third of Direct Line's shares, which were trading above the offer price by early afternoon.

RBS has to sell all of Direct Line - whose TV adverts have made its four-wheeled red phone motif a well-known corporate symbol - as a condition of a government bailout during the 2008 financial crisis that left it 82 percent state-owned. It will sell more shares next year and in 2014.

The bank said the sale was the next important step in its recovery plan, having earlier this year finished paying back emergency loans to Britain and the United States. It is also poised to exit a government insurance scheme later this year.

Priced at 175 pence per share, near the middle of the range RBS set in September, the listing values the business at 2.6 billion pounds ($4.2 billion).

Its shares were trading 7 percent higher by 1345 GMT, a firm performance which is a positive sign for initial public offerings (IPOs) in Europe after a dearth of new listings.

Germany's third-biggest insurer Talanx AG has performed well after its IPO last week, with its shares trading 8 percent above the offer price.

RBS had been under pressure to secure a good price for Direct Line, with taxpayers sitting on a loss of 21 billion pounds after Britain pumped in 45 billion to rescue the bank.

Analyst Eamonn Flanagan at brokerage Shore Capital said the sale was a "reasonable outcome", although the company's value is below the cut-off point of about 3 billion pounds for inclusion in Britain's elite FTSE 100 share index .

STRONG DEMAND

The IPO was the biggest share offering to the general public in Britain since money manager Hargreaves Lansdown Plc five years ago.

Direct Line said individual, or retail, investors had on average bought between 5,000 and 6,000 pounds worth each, taking up 15 percent of the shares. The rest were bought by institutional investors such as pension funds.

Demand was helped by the strength of Direct Line's brands, which also include Churchill, Privilege and the Green Flag roadside recovery service and are instantly recognisable to British investors.

The insurer has also pledged to pay up to 60 percent of its profit in dividends to shareholders, giving its shares an estimated yield of about 7 percent, far exceeding low single-digit returns on most bank savings accounts.

"Direct Line is a household name so it works well for retail. But there is always a downside involved in that if the shares perform badly, does it hit your business?," said one equity capital markets banker.

The shares could be held back by lacklustre growth prospects for the UK motor insurance industry, in which Direct Line is the biggest player. The industry has not made a profit from underwriting in 18 years because of intense competition and rising claims.

"We think the medium to long-term outlook is difficult. The trading environment in UK motor is competitive and getting more so," said Panmure Gordon analyst Barrie Cornes.

Direct Line's IPO could encourage other companies already considering a London listing to sell shares to members of the public. Santander UK is expected to split from its Spanish parent and list next year, while new bank Metro is planning an IPO in 2014.

But bankers said it was unlikely to prompt a rush of retail offers, as many of the larger companies which join the London Stock Exchange come from emerging markets and are not well-known names in Britain.

With European investment banking fees at a 10-year low so far in 2012, Direct Line's listing marks a rare pay day for investment banks, and comes after the collapse on Wednesday of a proposed $45 billion merger between British defence group BAE Systems BAES.L and EADS EAD.PA.

Goldman Sachs and Morgan Stanley ran the Direct Line offering, acting as joint bookrunners along with UBS . They are in line to share fees of as much as 17.4 million pounds with the other eight banks involved in the sale of shares to institutional investors.

($1 = 0.6242 British pounds)

(Additional reporting by Myles Neligan; Editing by Erica Billingham)

((matthew.scuffham@thomsonreuters.com)(02075426734)(Reuters

Messaging: matthew.scuffham.reuters.com@reuters.net))

Keywords: DIRECTLINE IPO/