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UPDATE 5-RBS hits milestone with Direct Line listing

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* 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 madea solid stock market debut on Thursday, marking a milestone inparent Royal Bank of Scotland's (RBS) recovery efforts.

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

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

The bank said the sale was the next important step in itsrecovery plan, having earlier this year finished paying backemergency loans to Britain and the United States. It is alsopoised to exit a government insurance scheme later this year.

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

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

Germany's third-biggest insurer Talanx AG hasperformed well after its IPO last week, with its shares trading8 percent above the offer price.

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

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

STRONG DEMAND

The IPO was the biggest share offering to the general publicin Britain since money manager Hargreaves Lansdown Plcfive years ago.

Direct Line said individual, or retail, investors had onaverage bought between 5,000 and 6,000 pounds worth each, takingup 15 percent of the shares. The rest were bought byinstitutional investors such as pension funds.

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

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

"Direct Line is a household name so it works well forretail. But there is always a downside involved in that if theshares perform badly, does it hit your business?," said oneequity capital markets banker.

The shares could be held back by lacklustre growth prospectsfor the UK motor insurance industry, in which Direct Line is thebiggest player. The industry has not made a profit fromunderwriting in 18 years because of intense competition andrising claims.

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

Direct Line's IPO could encourage other companies alreadyconsidering a London listing to sell shares to members of thepublic. Santander UK is expected to split from its Spanishparent and list next year, while new bank Metro is planning anIPO in 2014.

But bankers said it was unlikely to prompt a rush of retailoffers, as many of the larger companies which join the LondonStock Exchange come from emerging markets and are not well-knownnames in Britain.

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

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

($1 = 0.6242 British pounds)

(Additional reporting by Myles Neligan; Editing by EricaBillingham)

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

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

Keywords: DIRECTLINE IPO/