Insurance Risky in the Film Business : Financing: Late or over-budget movies can wring millions from completion bond firms, which lately have become more competitive and willing to take on more risk as a result.

Acclaimed film director Spike Lee has publicly berated Bette L. Smith during the past few months because Smith’s Completion Bond Co. took control of Lee’s unfinished “Malcolm X” when the film went $5 million over budget.

But Lee’s criticism probably doesn’t hurt nearly as much as the money Completion Bond and its parent, Woodland Hills-based Transamerica Insurance Group, could lose on the film.

Completion Bond, in Century City, is the biggest of a handful of companies specializing in guaranteeing that independently produced films will be completed on time and within budget, controlling an estimated 50% of that market.

Major studios generally don’t use bond companies because they line up the financing themselves, but it’s virtually impossible these days for an independent producer to get a film bankrolled without a completion guarantee.

Since Smith founded Completion Bond in 1981, the company has guaranteed about 800 motion pictures with aggregate budgets of about $2 billion. Among the films it has guaranteed are Oscar-winners “Driving Miss Daisy” and “The Last Emperor,” and until recently its biggest loss was on “Yentl,” a Barbra Steisand film that cost Completion Bond more than $1 million in overruns.

But “Malcolm X” and another film that Completion Bond took over last month, “The Thief and the Cobbler,” are a sign of the tough times in the film guarantee business.

Completion Bond and its competitors have been locked in a fierce price war. Guarantors used to keep as much as 3% of a film’s budget as payment for its services; they now net about 1.5%. At the same time, independent production companies have been struggling financially and finding it more difficult to line up financing for their productions.

Some industry veterans say the result of these changes is that guarantors are more willing to take risks on films they would have passed on a few years ago. “What we’ve got here is guarantors getting very, very reckless,” said Tekla Morgan, president of International Film Finances, a completion bond company owned by Fireman’s Fund Insurance Co.

Richard Soames, president of Film Finances Inc., the oldest company in the completion guarantee business and Completion Bond’s biggest rival, said “The Thief and the Cobbler” was a bad bet to begin with.

Completion Bond issued its guarantee on the project in 1990, even though the Oscar-winning animator Richard Williams had already worked on the animated, Arabian Nights-themed feature for more than two decades.

“I wouldn’t have gone near it,” Soames said.

But Smith, who sold Completion Bond to Transamerica in 1990 for undisclosed terms and remains its president, said Completion Bond has not loosened its underwriting standards.

“The practice and policies of Completion Bond have not changed measurably since we opened our doors,” she said. “I hope we’ve gotten better.”

In addition to “Malcolm X” and “The Thief and the Cobbler,” Completion Bond has taken over several other films recently, Smith said, although she wouldn’t discuss the other productions. But, she said, the losses it has paid on those projects simply reflect the fact that riskier films are being made today--and risky projects have always been Completion Bond’s forte.

“We’re normally the completion guarantor that people seek out when they have risky projects,” she said.

When Completion Bond takes over a film, it often allows the production company to finish the project under the guarantor’s watchful eye--even though it has the power to make virtually any changes it wants, including firing the director. But with “Thief,” Completion Bond reportedly paid back Fuji Bank for its $18-million loan on the film and then hired a crew of animators to finish the remaining work.

Smith said she is now shopping “Thief” around to various distributors in hopes of selling the film and recouping Completion Bond’s costs.

In the case of “Malcolm X,” the movie’s original budget was $28 million. When Spike Lee’s movie shot past that figure, Completion Bond allowed Lee to maintain creative control, but told him in March that he must stop editing work on the film, or any losses suffered from then on would be the director’s responsibility.

Lee, however, was bailed out at the last minute by friends such as Bill Cosby and Oprah Winfrey, who chipped in the funds to help Lee finish the film, an epic based on the life of the slain black activist.

Granted, Completion Bond might cover its losses and then some if “Malcolm X” is a big hit. But even if it does relatively well, Completion Bond will probably have to stand in line as production and marketing costs, distribution fees and other expenses are paid. Smith said if the film grosses $100 million worldwide, Completion Bond will get its money back.

Even if Completion Bond never gets a penny back from either film, it certainly wouldn’t be a disaster for Transamerica Insurance. The property-casualty insurer reinsures Completion Bond’s guarantees, meaning that the guarantor buys an insurance policy from its parent that covers it for certain potential losses.

Completion Bond itself is just a tiny part of Transamerica Insurance and its parent Transamerica Corp., the giant San Francisco-based financial services concern with $6.8 billion in revenue in 1991. Although it doesn’t break out Completion Bond’s results, in 1991 Completion Bond wrote guarantees on productions with budgets totaling more than $800 million. Assuming its fee was 1.5% for each film, that means Completion Bond’s revenue was just $12 million.

Nonetheless, Transamerica can’t be too happy about Completion Bond’s troubled film projects. Still, a Transamerica Insurance spokesman said the company is not considering getting out of the completion guarantee business.

There are also those who think the “Malcolm X” and “The Thief and the Cobbler” fiascoes might actually be healthy for the industry in the long run.

“I wouldn’t call these two instances bellwethers,” said Gary Matus, senior vice president and head of the entertainment industry group at BankAmerica. But Matus said Completion Bond’s takeover of the two films could reflect an increased cautiousness about projects that exceed their budgets.

This in turn might make filmmakers more accountable to their financial backers, he said, and ultimately that could help attract more capital to independent productions.

Completion Bond definitely has an interest in helping independents obtain financing. Such an interest, in fact, that in March the company announced plans to start a movie finance service to help independents secure funding for their films, and has aligned itself with several banks.

The financing service is a natural extension of Completion Bond’s current business, said Fred Milstein, a Completion Bond vice president who is heading the new unit. It’s also a way to feed the independent filmmaking mill, and thus, the demand for completion guarantees.