HOLLYWOOD — The number of completion bond companies has contracted by more than half during the past year, but the handful that remain say they will have no trouble covering the needs of independently financed films.
The recent shrinkage in the completion bond industry, which issues guarantees that movie projects will be completed on time and on budget, was an inevitable — and healthy — response to an overcrowded market, insiders say.
“Two years ago there were nine companies. There was a stampede into the business because people thought it was good,” says Steven Ransohoff, executive VP at Film Finances. “But charging less so they could buy business isn’t a good business plan.”
But in the case of Cinema Completions Inc., which announced recently that it will close its doors later this year, the problem wasn’t its business model. CCI’s parent, CNA Insurance, decided to focus on its core business after getting hit hard with losses from Sept. 11. “We make money but our contribution to CNA’s bottom line isn’t large,” says a company executive.
Film Finances generally deals with pics that cost under $25 million and expects to do in excess of 200 movies this year, slightly below last year. Los Angeles-based Intl. Film Guarantors (IFG) handles the heftier budgets, and looks set to bond roughly 40 films this year, the same, or slightly better, than 2001. Worldwide Film Completion bonded 15 to 20 movies last year. Another smaller company, Cinefinance, bonded five.
At the same time, however, because the price of insurance is going up across the board, partly because of costs associated with the events of 9/11, indie producers can expect to pay more not only for completion bonds but for all forms of entertainment insurance. They can also expect more stringent requirements from both bond companies and lenders, which favor experienced hands over newcomers without a track record.
IFG’s prexy and chief operating officer, Steve Mangel, says the current environment demands projects that are thoroughly vetted by seasoned producers. “Over the past year or two, banks have become more conservative, which makes it tough for producers, but a well-thought-out project will find banks to loan them production loans and bond companies to bond their projects.”
Films with budgets of over $50 million may be tougher to bond, however, because reinsurers, which pick up a portion of the risk from the direct insurer, are much more cautious. “Everyone will have a tougher time with higher budgets, except Fireman’s Fund, which has a long history of purchasing reinsurance,” says Steve Cardone, president of Worldwide Film Completion.
That caution, explains Cardone, comes from not only 9/11 but from last year’s insurance-backed finance debacle involving JP Morgan Chase and reinsurer Axa, in which a New York lower court ruled Axa should pay Chase for a shortfall in revenues from films the bank financed. Axa is appealing the case.
Another potential wrinkle is the outcome of recent federal charges filed against Michael Segal, chairman-CEO of Near North Insurance Brokerage, a sister company of IFG. Segal is charged with embezzling $20 million in insurance premiums from Near North.
Industry insiders say, since the complaint is only against Segal and has no connection with Near North or IFG, the completion bond business should remain unaffected. IFG is a limited partnership between Near North and Fireman’s Fund Insurance, whose deep pockets make IFG the only bonding company capable of handling megabudget productions.
Making a case
“The complaint was filed against Segal, not Near North,” says Fireman’s Fund spokesman John Kozero. “We’re actively monitoring the situation and we don’t see any need to do anything differently. We will continue to write completion bond funding through IFG. If anybody has any completion bond needs, please come to us.”
For one veteran indie producer, the higher bond and insurance costs are simply a fact of life. “You have to cover the costs, but it’s not keeping movies from being made,” says Paul Hertzberg, president, Cinetel Films.
The biggest challenge for indie producers isn’t so much higher insurance costs as getting financing to begin with. “You need to prove your movie is viable,” adds Hertzberg, “and that comes from people with track records, pre-sales, equity and a small amount of gap financing from a bank.”