Insurer Guarantees That Movies Have an Ending--Happy or Otherwise

Bette L. Smith doesn’t get any thank yous on Oscar night, but she delights in ticking off the names of movies that might never have been made without her: “Driving Miss Daisy,” “A Passage to India,” “The Last Emperor,” “Do the Right Thing,” “Greystoke” and “sex, lies and videotape.”

In an industry known for big budgets and big egos, Smith’s firm, Completion Bond Co., brings a measure of security with a very specific form of insurance. While some movie insurers offer cast insurance in case a big star takes ill or gets in an accident, Completion Bond insures the film’s financial backers that the movie will be delivered on schedule and within budget--or it will pay to finish the film itself.

Take “The Last Emperor,” the Oscar-winning film by Bernardo Bertolucci that frightened financiers because of filming in China’s Forbidden City, a huge cast and a Chinese, Italian and English crew. “Every other guarantor in the marketplace turned it down,” said Smith. But Completion Bond took it on and it proved a good bet: The film was done on time and within budget. Completion Bond kept a fee that was likely 2% to 3% of the film’s $24 million budget--or $480,000 to $720,000.

This year, Completion Bond expects to guarantee about 150 films with budgets averaging $5 million to $8 million. Assuming Completion Bond is paid 2% of each budget as its fee, it will rack up about $20 million in revenue this year. It has about 60 films in the pipeline, including Franco Zeffirelli’s “Hamlet,” with Mel Gibson and Glenn Close; “Dancing With Wolves,” Kevin Costner’s directorial debut, and “Love Field,” with Michelle Pfeiffer.

Completion Bond, founded by Smith in 1981, is based in Century City and was recently acquired by Transamerica Insurance Group in Woodland Hills.

Completion Bond along with rival Film Finances, based in Britain, are the Hertz and Avis of the movie completion insurance business, splitting about 90% of the domestic completion guarantee business. Film Finances, which was founded in 1950, is the oldest company in the completion guarantee business and virtually owned the market until Completion Bond’s emergence. But since Smith got in the business, Completion Bond has guaranteed more than 530 films with aggregate budgets of more than $1.6 billion.

Last month, in a move to become a major entertainment insurer, Transamerica Insurance Group acquired Completion Bond for undisclosed terms. Smith remains Completion Bond’s president.

There’s an irony to the deal because Transamerica’s parent, Transamerica Corp., could have used Completion Bond a decade ago when it owned United Artists, the studio that produced one of the biggest disasters in Hollywood history, “Heaven’s Gate.” The movie was budgeted at $12 million but cost more than $40 million. When the film flopped, UA suffered heavy losses. Transamerica sold UA to Metro-Goldwyn-Mayer Film Co. in 1981.

The worry in the bond business is getting stuck with another “Heaven’s Gate.” Film Finances was involved in the industry’s latest debacle, “The Adventures of Baron Munchausen,” a film directed by Monty Python’s Terry Gilliam that went far over budget because of elaborate effects and production delays. Film Finances took over the film and paid more than $15 million to finish it.

Smith said she turned “Munchausen” down before it went to Film Finances. After studying the budget, “We just couldn’t reconcile the numbers,” she said.

Not that her record is perfect. Smith’s biggest loss to date was “Yentl,” starring and produced by Barbra Streisand. In retrospect, Smith said, the film’s budget was too small to cover a tight shooting schedule, weather problems and the logistics of filming in Czechoslovakia. Completion Bond paid more than $1 million in cost overruns on “Yentl” and took over post-production. “We learned our lesson,” said Smith.

These days Completion Bond faces more competition from upstart companies at a time when independent productions--the heart of the completion guarantee business--have hit a cyclic slow point. In addition to a new completion guarantee service started by Carolco, for instance, Fireman’s Fund, Completion Bond’s former reinsurer, recently started International Film Guarantors. Tekla Morgan, a former Completion Bond executive, is International Film’s president.

Smith got into the business after working at Albert G. Ruben & Co., an entertainment industry insurance brokerage that, among other things, sells cast insurance. Ruben is run by Smith’s husband Scott Milne.

Smith said she was ready for a change when she started Completion Bond with “over $100,000” in personal savings. Her firm got off to a fast start because Fireman’s Fund agreed to underwrite all of her guarantees. Both Smith and Fireman’s Fund figured that with only Film Finances dominating the market there was room for another player. It helped that the number of independent productions requiring guarantees was growing rapidly. Smith said she broke with Fireman’s Fund last year when Transamerica lured her away.

A typical completion bond deal is set up after an independent movie producer has secured the rights to a script, hired cast and crew and sealed a distribution deal, often with a major studio. Then the producer tries to get financing--usually from a bank.

In most cases, the bank will require a completion guarantee. “I wouldn’t finance a film without a completion bond,” said Ken Coopman, senior vice president of Bank of America’s entertainment group. “It’s like cast insurance,” said Morgan of International Film Guarantors. “No one’s going to go out there, unless they’re completely nuts, without basic coverage.”

While completion guarantees are almost a necessity for independent film makers, major studios often finance in-house projects themselves and don’t use completion guarantees. There are exceptions, however, such as when a film has expensive special effects or exotic locations.

A completion guarantor will study a film’s budget and schedule, taking into account the reputations of the producer, director and actors. If she has doubts, Smith said she’s willing to be persuaded that a project will work. For example, when Akira Kurosawa, the veteran Japanese director, sought a guarantee for his latest film, he set up a special effects demonstration for Completion Bond at a Sony facility. Smith agreed to guarantee the film.

For many years, completion guarantors charged 6% of the budget, with half the fee returned if the project came in on budget. Recently, however, because of the increased competition, rates have been pushed down and some guarantors have begun charging lower going-in fees, with no rebate.

Smith said her fees average about 5%, with half of that rebated if all goes as planned. Claims are filed only after a producer has gone through a 10% budget “cushion” that was set aside prior to production. If a claim is filed, the guarantor pays to finish the film, but often will take over the production.

Completion Bond has paid losses on less than 20 projects because Smith and her staff of 18 in Los Angeles and six in Europe closely examine daily progress reports and weekly cost statements. At the first hint of trouble, she said, a Completion Bond representative is on the set, trying to work out problems.

John Daly, president of Hemdale Film Corp., which produced “Platoon,” “The Last Emperor” and “Hoosiers,” said most producers like the watchdog effect of a completion guarantor. “It keeps you on your toes,” he said. Smith said she’s never fired anyone from a film--although she has the power to do so if a production runs amok.

Though Smith’s involvement with a film ends when it is delivered to a distributor, she has more than a passing interest in a movie’s reception at the box office. She said a commercial success “means the producer will be able to attract financing for another film and come back to us.”