ROYAL Bank of Scotland today confirmed plans to spin off its Direct Line and Churchill insurance arm in a highly-anticipated stock market flotation.

The 80% state-owned lender must sell its interest in Direct Line Group, which also includes the Green Flag and Privilege brands, under a European-imposed condition of its �45billion state bailout in 2009.

Around 25% or more of Direct Line Group, whose Churchill brand is represented by the popular nodding dog, will be offered in the initial share sale with additional tranches to follow.

RBS must sell a majority stake in Direct Line Group by the end of next year, and divest itself of the entire company by the end of 2014.

Direct Line Group, which has 4.2million personal motor policies and 4.3million home insurer policies in force, should be worth around �3bn, according to analysts. No new shares will be offered in the group, which is already acting as a standalone company.

Direct Line Group chief executive Paul Geddes said: “Our people have worked hard in recent years to transform the business in order to take advantage of our distribution, scale and market leading brands.

“Our work to maximise these advantages is by no means complete and we have a clear strategy that spans distribution, pricing, claims and operational efficiency.”

Today’s announcement comes just over a week after Direct Line Group announced proposals to axe nearly 900 roles and close a site in the North East.

The group, which employs about 15,000 staff in the UK, is planning the redundancies as part of plans to make �100m of cost savings by the end of 2014.

The group said a total of 891 roles would be affected, including around 500 at a call centre in Stockton-on-Tees which it plans to close, although it said it was unable to say yet which of its 14 others sites around the country would be affected and how many jobs, if any, would go at each location.

That meant further uncertainty for Churchill staff in Ipswich, where the company last year closed its former offices in Crown Street into order to focus operations in the town at its Princes Street site.

Direct Line Group, which has a market share of 19% in motor and 18% in home insurance, reported a 7% rise in operating profits to �224.2m in the first half of 2012.

The group, which has its headquarters at Bromley, in south-east London and also has operations in Germany and Italy, recently secured a five-year contract with Sainsbury’s Finance to provide customers with home and car insurance.

The group also introduced a new management system to deal with motor claims at Churchill, Direct Line and Privilege, as well as new home claims at Churchill, to improve efficiency.

Bruce Van Saun, group finance director of RBS, said: “Direct Line was launched more than 25 years ago as a pioneer of direct motor insurance and it has grown to become the market leader in UK personal lines insurance.

“We believe it has a strong future as a standalone insurance group continuing to serve its customers well while delivering attractive returns to investors.”