Pic funding takes hit

Insurance firms retreat as pix policy losses loom

The rush of insurance companies into Hollywood, which has provided a bountiful source of cash for independents and studios alike in the past two years, is stalling as insurers react to multimillion-dollar losses on poorly performing pics and aggressively designed policies.

Among the insurers pulling out while they “re-evaluate” the market are Axa Reinsurance of France — described by one exec as having the single biggest exposure to the film industry of any major insurer — American Intl. Group and G.E. Capital’s Kemper Securities.

Axa not only pulled out of the market but fired the exec writing its policies, Jean-Michel Guillot, several weeks ago, citing his deviation from Axa’s underwriting guidelines intended to limit the insurer’s risks, said Eric De Rotte, a senior VP at Axa Re in Paris. Guillot could not be reached for comment.

Collateral business

Studios that have utilized insurance policies to back film financing in the past couple of years include Viacom’s Paramount Pictures, Seagram’s Universal Pictures, Metro-Goldwyn-Mayer and Sony Pictures Entertainment. Insurers essentially provide collateral for film loans from banks by insuring the performance of pics.

Not every insurer is pulling out. Some, even those which have lost money like Bermuda-based XL Insurance, are sticking with Hollywood.

But insurance execs say future deals will be much less favorable to the film industry. Producers will be expected to carry more of the risk, execs predict.

Focus on the big guys

To reduce their risk, insurers will focus more on big deals with major studios and less on the financing of independent pictures either singly or in groups–an approach which has characterized many deals until now.

The insurers’ long-predicted retrenchment began last spring as word of losses on a policy put together by UK broker C.E. Heath for Phoenix Pictures began to circulate. XL is believed to have lost more than $15 million on its exposure to the policy, which covered Phoenix pics including “The Mirror Has Two Faces” and “The People vs. Larry Flynt.” XL declined comment.

Fears reinforced

In recent months the fears of wary insurers have been reinforced as a result of two watershed deals: a $100 million insurance-backed financing package put together last fall by Axa and AIG for Steve Stabler’s Destination Film Distribution, and the creation of an insurance-backed film library, Chaross Films, by Peter Hoffman and Jay Firestone. Such agreements are unlikely in the current climate, insurance and banking execs say.

Within three months of the Destination deal’s closing, both Axa and AIG had withdrawn from the film industry and Axa had fired Guillot. One of AIG’s execs dealing with media and entertainment, Peter Gumbrecht, ended up leaving the insurer to join Destination, though sources say that was coincidental and Gumbrecht did not work on the Destination deal.

Ten other insurers participated in the Destination policy, execs said, and at least one of those — GE Capital’s Kemper Securities — has backed away from Hollywood while it reassesses the industry.

Lauded as ground-breaking at the time, the Axa/AIG-led Destination deal allowed Stabler and his partner Brent Baum to set up their indie without any of their own money. The two were able to raise $100 million in five-year bonds backed only by the insurance policy.

Insuring success

Essentially, the policy will cover any losses sustained by the bondholders if Destination loses money on pics it distributes over the next five years and cannot repay the bonds.

But that same feature violated a fundamental financial principle, several bankers and insurers said, which is that every party to an insurance deal should have money at stake — not just the insurer. Several insurers already expect to lose money on the deal, sources said, though Destination has yet to release a pic.

The deal looked so good to wannabe producers that it prompted a flood of similar proposals, none of which is likely to be approved.

No problems, says Stabler

Destination chairman Steve Stabler strongly disputed suggestions that his deal has caused problems for the industry. He insisted that he and Baum had money at stake because they had deferred “all of our fees” until the insurers recouped their money.

Stabler added that Destination had asked its insurers not to back any similar deals that would create another North American distribution company because it would give rise to competition in the marketplace, hurting both Destination and its backers.

Axa’s De Rotte declined to comment on whether the Destination deal prompted Axa’s withdrawal, saying only that there were “many reasons” behind Axa’s decision.

Axa reviewing policy

Axa is now “reviewing all of the different structures we have seen” in Hollywood to decide “what could be acceptable and on what basis should be done,” De Rotte said.

AIG execs in London did not respond to requests for comment, but sources said the insurer was not at risk with respect to the Destination deal as it had merely allowed its name to be used on the policy for a fee.

Axa was one of the companies involved in the Chaross deal, sources said. Hoffman and Firestone created Chaross in January to purchase more than 20 independent pictures that lenders such as Imperial Entertainment Group had taken over from their producers due to nonpayment of gap loans.

Hoffman and Graham Bradstreet’s consulting firm, ICE Media, together with C.E. Heath, brokered an insurance deal for a portion of the Chaross purchase. The insurance element guarantees that the bank and Chaross will recoup their outlay from the ancillary pic revenues over a certain time period.

Pix a risk

Observers believe, however, that the Chaross deal leaves insurers in an especially risky position as many of the pics lack distribution deals and will thus find it difficult to recoup their production costs, let alone go into profit. Hoffman was traveling and could not be reached for comment.

Sources said it was the widely publicized specter of Phoenix losses which influenced AIG’s decision to pull out. As the Phoenix deal was one of the first done in the relatively new field of insurance-backed film financing, the Phoenix losses were seen as a harbinger of the danger to insurers, sources said.

Kemper’s re-evaluation was prompted by its acquisition by GE Capital, a spokesman said. GE was not in the film financing business itself and asked Kemper to “suspend that particular coverage … until we can understand the risks better,” a spokesman for GE Capital said.

Some insurers retreat

“A number of insurance companies have retracted substantially in this marketplace,” said Laurey Hoffman, senior VP of Chicago-based Aon group and CEO of Aon’s Global Entertainment and Media Insurance Agency.

But he said insurers suffer losses in all industries, and what prompted the insurers to pull out was that too many of the policies written in the past couple of years allowed the producer or studio to lay off too much risk.

Hoffman likened this flaw to insurers selling a home owners or car insurance policy without a deductible. Insurers would not sell such a policy “because the home owners’ insurer always wants to make sure that (the home owner) always has the incentive to have a smoke alarm or other devices” to reduce the risk, he said.

Hoffman predicted that most major insurers, including Aon (which acts as both a broker and underwriter), were in Hollywood to stay, particularly with big slate deals for studios and foreign distribution companies like Canal Plus.

One senior film lender agreed, noting that “insurers are now beginning to hire industry execs as consultants in order to be better educated.”

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