The completion bond business is a mess.
Hollywood’s largest guarantor, Completion Bond Co., has stopped insuring films. The industry’s oldest backstop, Film Finances, has had its wings clipped by its reinsurer, Lloyd’s of London, which is grappling with a myriad of problems of its own. And Intl. Film Guarantors is forecasting 30% to 50% price hikes for its completion bonds in the coming months.
What’s happening here? Industry sources say the current chaotic climate is the product of years of competitive price-cutting in the face of escalating claims.
For independent producers who depend on the bonds in order to secure bank financing, the impact will be significant — namely, higher prices charged by a dwindling number of suppliers.
CBC was ordered by its parent company, insurance heavyweight Transamerica, to stop insuring films as of March 31. Attorney Steve Fayne of Rosenfield, Meyer & Susman, who represents CBC, says the moratorium is a byproduct of Transamerica’s $ 600 million spinoff of certain assets, including CBC, to form a new, publicly traded company — TIG Holdings Inc.
“Right now, that’s where their attention is directed,” says Fayne, adding that the moratorium will remain in effect until the stock offering is completed this month.
But others say the truth of the matter is that Transamerica has become increasingly frustrated with CBC’s growing list of problem deals. “Malcolm X,” the $ 20 million animated feature “The Thief and the Cobbler” and Sylvester Stallone’s “Cliffhanger” all came in well over budget.
Some industry insiders contend Transamerica is looking to jettison CBC and will eventually shutter the unit if a buyer isn’t found.
The fact that Transamerica entertainment veep Robert Anders and two others from the entertainment division have recently exited lends credence to the notion that Transamerica is seeking to scale down itsshowbiz exposure.
Paradoxically, many say CBC itself is the company most responsible for the current sorry state of the completion bond business.
CBC was founded in 1981 by Bette Smith as an alternative to Film Finances, which had the completion bond market virtually to itself since its inception in 1950.
While a number of other competitors sprung up in the early 1980s, CBC — backed by Fireman’s Fund — quickly established itself as the strongest. By 1990 , CBC and Film Finances were each guaranteeing more than 100 pictures a year and splitting the lion’s share of the completion bond market worldwide.
Smith parted ways with Fireman’s Fund in 1990 and sold her company to Transamerica for a reported $ 20 million.
But CBC’s tremendous growth was achieved, at least in part, through cutthroat price-cutting. For years the typical fee for a completion bond was 6% of the production budget, with a 50% rebate in the event that there were no claims. Today, rates have been driven as low as 1%.
While the price-cutting forced some weaker competitors out of the business, it also permanently lowered margins for the survivors.
Sources say CBC was able to make the pricing work by treating its completion bond business as a loss leader; deriving most of its profits from other forms of insurance it would provide producers.
But keeping the pipeline filled also spurred the guarantor to underwrite an increasing number of deals that it probably would have walked away from in the past.
“In the insurance business there is a lag time between premiums coming in and losses paying out,” says another guarantor. “If you’re a hot seller constantly rolling in premiums from new business, you can delay that inevitable day when somebody in accounting says, ‘Whoa, we got losses here that don’t make sense with what we’re charging.’ ”
Sources say that was the reason for Smith’s break with Fireman’s Fund in 1990 and is again the reason for Transamerica’s current moratorium.
While the fate of CBC appears unclear (Smith could not be reached for comment), the long-term outlook for its rival Film Finances seems no more certain.
While some sources say Film Finances has been guaranteed backing from reinsurer Lloyd’s of London through 1993, they also note that Lloyd’s is being sued over past difficulties, and some banks are shy about doing business with it. Film Finances exex did not return calls.
The one winner could be Intl. Film Guarantors, which issues bonds directly from its backer — the $ 14 billion Fireman’s Fund insurance company (which is owned by Germany’s Allianz Holdings, the sixth-largest insurance company worldwide).