A photo illustration shows insurance renewal notices from Direct Line in London

Direct Line shares traded higher on their London Stock Exchange debut after an £800m stake sale by its parent, government-owned Royal Bank of Scotland Group.

The 450m share sale raises around £787m for the state-rescued lender and values Direct Line, Britain's biggest car insurance group, at around £2.6bn. The sale was forced upon RBS by the European Union in return for its approval of the UK government's £45.5bn bailout of RBS back in 2009. RBS needs to sell the remaining 70 percent stake it holds in Direct Line by the end of 2014. Around 15 percent of today's sale was held back by RBS and could be sold in the near future.

Direct Line shares were initially priced at 175 pence each - near the middle of the range at which the shares were marketed to individual and institutional investors - before rising by at least 3 percent in the opening minutes of London trading.

Direct Line posted a 7 percent increase - £224.2m - in first half earnings this year but paid out more in claims than it collected in premiums, suggesting profitability will be difficult to maintain. A further challenge to the stake sale will may come from an investigation into the car insurance market by the UK's Office of Fair Trading. The watchdog has warned that market suffers from "dysfunctional" competition and has made a formal request to Britain's Competition Commission authorities for a full investigation.