SHARES in Royal Bank of Scotland's insurance business Direct Line soared to a 7.4% premium on their listing price on their stock market debut, leaving the part-nationalised institution well placed to sell the rest of the business.

Strong demand from private investors enabled Edinburgh-based RBS to sell 30% of Direct Line's shares at 175p each, in a move that raised £787 million for the bank and valued the business at £2.6 billion. The shares changed hands for as much as 189.25p yesterday before closing at 188p.

RBS's shares also received a fillip, finishing the day up 11.1p or 4.2% at 273.8p.

RBS finance director Bruce Van Saun said: "This is another important milestone. The successful offering rests on outstanding effort by the Direct Line management team to re-position the business, while also gearing up to the demands of being a separate public company. Direct Line is on the path to a bright future."

The offer price of 175p for the 450 million shares was slightly below the mid-point of 160p to 195p range that RBS initially indicated it wanted to sell at.

Private investors took up 15% of the stock sold, purchasing on average £5000 to £6000 worth of shares. Direct Line chief executive Paul Geddes, who opened trading at the London Stock Exchange yesterday, said the offering had been "comfortably oversubscribed". He added: "We look forward to life as a publicly listed company with the support of a strong and diverse shareholder base."

Stuart Welch, chief executive of TD Direct Investing, said: "The strong interest we have seen in the Direct Line IPO by TD clients has continued following the start of conditional trading. This IPO has captured investor interest."

With a 15% over-allotment option expected to be utilised, RBS will continue to own 65.3% of the insurer. RBS plans further share sales next year and in 2014.

In an agreement with European Commission competition officials, it agreed to sell the business as a condition of its £45bn Government bailout in 2008. RBS must sell more than 50% of Direct Line by the end of 2013 and the rest of its shares a year later.

The flotation was successful despite concerns investor appetite would be damaged by an investigation by the Competition Commission into the car insurance market.

Analyst Eamonn Flanagan of Shore Capital said the price for Direct Line stock was a "reasonable outcome", although the company's value is below the cut-off point of about £3bn for membership of the FTSE-100.

Xavier Rolet, chief executive of the London Stock Exchange, said: "This significant capital raising demonstrates that London remains very much open for business for ambitious companies.

"Of particular note is the level of retail interest in this issue."