Following months of speculation, UK direct motor and home insurer Direct Line has revealed details of its initial public offering (IPO) on the London Stock Exchange.

The flotation is part of a deal between Direct Line’s parent, the Royal Bank of Scotland Group (RBS), and European financial regulators, which demanded RBS sell its controlling stake by the end of next year – and the entire stake by the end of 2014 – as part of its 2008 bailout by the UK Government.

The move was announced after the company called off talks with private equity investors.

The prospectus is yet to be released but under the proposed terms of the IPO 25% of Direct Line will be sold to institutional and retail investors, and no new shares will be issued.

A further tranche of shares in the company is expected to be offered next year, with a final sale in 2014.

Analysts value Direct Line Group – which includes the personal lines brands Direct Line, Churchill and Privilege, plus commercial insurer NIG – at about £3 billion ($4.65 billion). 

It is the UK’s leading personal motor and home insurer in terms of policies, with 4.2 million and 4.3 million policies respectively.

“We look forward to being a listed company and are more committed than ever to providing customers with excellent products and service levels, while seeking to deliver sustainable returns for our shareholders, targeting a 15% return on tangible equity from ongoing operations,” Direct Line Group CEO Paul Geddes said.

Other UK companies considering IPOs, including insurance group Hyperion, which comprises underwriting arm Dual and broker Howden, will watch the flotation closely.

Keith Williams, Head of Financial Services at international investment bank Latium, says the float will be “very telling” for the insurance industry.

“With other businesses shying away from the stock market, this enforced divestment will act as a test case for other insurance firms eyeing potential IPOs who have held off due to the volatility in the market.

“Historically, listed insurers offer a good dividend yield for investors. However, Admiral has warned that insurance premiums are falling in value and Direct Line lacks exposure in emerging markets to mitigate problems in the UK.

“Both of these factors will be weighing on the minds of potential investors as they run the rule over the Direct Line IPO.”