LAS paid pounds 1.4m for property stake

LIFE Association of Scotland, the small life insurer recently fined for failing to control its affairs in a responsible manner, paid nearly pounds 1.4m for shares in a struggling property company shortly before large write-downs in the value of its properties.

The purchases of shares in Dunedin Property Investment Company made an instant profit of at least pounds 550,000 for Wallace Mercer, the chairman of Heart of Midlothian, the Edinburgh football club. Mr Mercer, who also ran Dunedin Property until last February, returned to Britain on Friday, having moved to the south of France nine months ago.

LAS policyholders, whose money had supported the growth of Dunedin Property, were not so fortunate. LAS's new owners said last week that policyholders lost all their pounds 10m equity in Dunedin - and had theoretically faced much larger claims because of the loan capital that had financed the bulk of Dunedin's investments.

Dunedin's only accounts since Mr Mercer left show that its properties' market value at the end of 1992 had fallen to pounds 38.1m, little more than half their historical cost of pounds 74.9m and the 1991 book value of pounds 72.6m.

Gavin Stewart, deputy managing director of Britannia Life, the building society-owned insurer that took over LAS last October, said the Dunedin group's debts were in excess of its assets by the end of 1991.

Yet only a few months earlier, in September 1991, LAS paid Mr Mercer pounds 990,000 for nearly 110,000 shares that he acquired on the same day for only pounds 439,000. LAS paid pounds 9.02 a share against the pounds 4 a share that Mr Mercer paid to exercise his options.

One week later, LAS paid Mr Mercer a further pounds 400,000, or pounds 9.41 a share, for another holding of 42,553 shares. The following month, Mr Mercer exchanged his remaining 227,447 shares for pounds 2m of loan stock. The tax payable on these deals was one of the reasons behind Mr Mercer's move to France last April.

Hit by the recession, Dunedin Property suffered losses of pounds 6.6m in 1991, later restated at pounds 7.5m. The directors cut pounds 15m from their valuation of the firm's properties. The accounts were produced on a going- concern basis, and made it clear that Dunedin was reliant on the financial support of LAS.

On Friday, Mr Mercer said all the decisions about Dunedin Property were taken with the knowledge of Nationale-Nederlanden, the Dutch insurance giant that was the previous owner of LAS. Mr Mercer said: 'If you're the managing director of a subsidiary of a major institution, and a minority shareholder, you are really put under very tight controls by the professionals within the company.'

Nationale-Nederlanden said yesterday that LAS's purchase of Mr Mercer's shares was at a price advised by external and independent advisers, and was based on a contract from the early 1980s. Nationale-Nederlanden said it decided in December 1991 to protect policyholders' interests and LAS's solvency margin against the UK property recession by guaranteeing the value of the Dunedin Property portfolio. 'The guarantee was at a higher level than the market value. By doing so, NN took the financial burden of the property recession on, instead of transferring the losses to policyholders.'

Richard Buchanan, LAS's chief executive and a director of Dunedin Property at the time of the share deals with Mr Mercer, did not return calls to the Edinburgh office of N&P Life. Mr Buchanan has recently joined National & Provincial Building Society as director of life assurance, pensions and investments.