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Underwriting HOLLYWOOD.

As the motion picture industry grows, so does the need for insurance. A new type of securitization pools blockbusters with bombs to guarantee profits.

When Fireman's Fund Insurance Co. insured the production of "Indiana Jones and the Last Crusade," producers were worried about a scene filmed in the catacombs beneath Venice, Italy. About 2,000 rats were being shipped in for the scene, and producers wanted to buy insurance to protect them in case the rats got sick and were unable to perform. Fireman's Fund asked if they could do the scene with a minimum of 1,000 rats. The producers said yes.

"And so, the world's first 1,000-rat deductible insurance policy was written," said John Kozero, a spokesman for Fireman's Fund.

Before Hollywood rolls out the red carpet for movie stars, film executives worry about red ink and take steps to avoid risks. Like any other industry, where there's risk, there's insurance. From basic traditional coverages--such as general liability and workers' compensation--to the exotic--such as Douglas Fairbanks Sr. insuring his famous profile against injury--insurers play an important role in the making of movies, often becoming as creative as the artists they're trying to protect.

"Insurers have been covering stars for decades, like the famous Lloyd's policy on Betty Grable's legs," said Robert Hartwig, chief economist with the Insurance Information Institute. "It may seem exotic, but it's really not. The U.S. has the largest movie industry in the world, and you can see how this is a big business that insurers would be involved in, although you don't see any Oscars awarded for the best insurance company."

Hollywood Pool

Now, Hollywood is using insurance to help guarantee profits. American Re Capital Markets, part of American Re Financial Products, has created an innovative type of securitization. The company pools a slate of movies and guarantees that the future revenue streams of all the films will cover the production costs of making the films.

"There's safety in numbers," said Ken Bock, president of AmRe Capital Markets. "If there are 15 films in the slate, you might have two hits, two dogs, and everything else will keep the lights on."

Most recently, AmRe Capital engineered a $540 million deal to be paid out over 10 years to Dreamworks SKG movie studio, which is owned by Steven Spielberg, Jerry Katzenberg and David Geffen. Chase Manhattan Bank brought the deal to AmRe Capital, looking for the reinsurer to provide credit enhancements to the movie studio to change its subordinated debt to investment-grade level. Dreamworks will repay the "loan" from the revenue generated by the movies it has placed with the Dream-works Film Trust II, which include "Saving Private Ryan" and "American Beauty." An important part of that type of transaction is capping the production costs, said Christine Hazen, vice president of entertainment and media risk finance for AmRe Capital.

"We're an insurance company, and we've taken a very traditional insurance approach to this," Hazen said. "We want the people we are working with to be substantially at risk or more at risk than we are."

AmRe Capital has created a computer model to engineer the deals, Hazen said.

"We gather data, we use an actuarial model to price the risk, we look at cost components, we look at expenses and model all those variables. We use deductibles or cost sharing in the structure. It's very similar to alternative risk underwriting," Hazen said.

One thing that AmRe Capital isn't interested in is who wrote the movie script and who will be starring in it.

"It's not part of the underwriting equation," Hazen said. "We're not interested in scripts or talent, but we are concerned about distribution. A lot of movies get made, but no one ever sees them."

Bock notes that when 20th Century Fox released "Star Wars," producers were surprised at its success.

"If the pros didn't know they had a monster hit on their hands, how would we know?" Bock said. Bock and Hazen said they aren't aware of anyone else writing this kind of product.

AmRe's securitization is similar to "Bowie Bonds," bonds that were based on the future revenue stream of recordings by singer David Bowie, Hartwig said.

"Everybody from David Bowie to the trial lawyers in the tobacco suits are trying to securitize future revenue flow. You might as well get a lump sum now and an insurer or some other entity will accept payments for as long as they last," Hartwig said.

No Business Like Show Business

A typical movie production can cost more than $300,000 a day and involve dangerous stunts, special effects, a cast and production staff of hundreds and unique liability exposures. A minor setback, like a sick or injured actor, can delay shooting and cost a studio millions of dollars.

American International Group, Chubb Group of Insurance Cos., St. Paul Cos. and Fireman's Fund are often named as the major players in the industry, although it's difficult to gather specific data, because the entertainment business is usually lumped in with other product lines. The companies themselves are often mum on just how much entertainment businesses they write.

The Insurance Information Network of California estimates that the film market raised about $100 million in insurance premiums in 1998, the most recent year for which information is available. About $60 million to $70 million stemmed from feature films, with the rest coming from independent films, said Pete Moraga, a spokesman with the network.

Entertainment insurance can cover everything from films and television shows to live plays and concerts. Film insurance is one of the most complicated types of this niche business, because there's so many variables to consider, Hartwig said.

"It's obviously a real challenge," Fireman's Fund's Kozero agreed. "It's a case-by-case situation."

Four basic types of insurance cover the production of a film:

* Cast Insurance. This covers any additional costs that can arise if a production loses a cast member, director or any personnel.

For example, when Sean Young broke her arm while practicing horse riding for a scene in the 1988 production of "Batman," her cast coverage was triggered, Kozero said.

"We had to find someone of equal or higher caliber," Kozero said. "We got Kim Basinger."

Young was injured just clays before shooting was supposed to begin. Fireman's Fund had to pay to redo costumes for Basinger, and buy out any other commitment Basinger had planned, Kozero said. The insurer talked the producers into cutting the horse scene from the movie. After all, they'd already hurt one actress, Kozero said. He declined to say how much the claim ended up costing.

* Errors and Omissions. This protects production companies from lawsuits involving a violation of personal rights, libel, slander and copyright infringement.

* General production. This includes standard insurance needed by any business, such as workers' compensation, general liability and commercial auto. It also includes costs of delays and reshooting due to inclement weather, equipment failure and set damage.

For the filming of "Apocalypse Now," Fireman's Fund had to shell out $1.5 million to replace the set of a village that was destroyed by a typhoon. General production insurance also includes equipment, faulty film stock and third-party property damage. In filming "Thief," actor James Caan plays a character who firebombs his house. While filming the dramatic fire scene, a stray ember drifted to a neighbor's house, sparking a fire that destroyed it, causing $900,000 in damage, Kozero said.

Completion bonding. This guarantees that a film will be finished. Independent films especially need completion bonding, because without the backing of a major studio, independent producers need to guarantee they will have the financial means to complete a film, according to the Insurance Information Network of California. "It protects the bankers' interests," Kozero said.

St. Paul offers a production package for feature films that covers cast, negative film and videotape, faulty stock, props, sets and wardrobes, equipment, third-party property damage, extra expenses, animal mortality, plus the standard business insurance, such as general liability and auto. St. Paul doesn't handle errors and omissions.

"AIG and Lloyd's does a lot of that. It's a different expertise, not what we're into," said Jon Paulsen, underwriting director of national programs for St. Paul.

As a general rule, the higher the production costs of the movie, the more expensive it will be to insure. To write film coverage, the company looks at the script.

"Is it a talking head or an action film? Are there stunts involved? We look at the cast, director, venue, the make sure they can get it done under the budget, or it could cause problems down the line," Paulsen said.

Artist Meets Actuary

"The most unusual challenges we face are dealing with the creativity of the directors from an insurance standpoint," Paulsen said. "Every time they want to make a movie, they want to make it bigger, better and more interesting. It goes right in the face of the conservative insurance company."

But insurers do have a say in how a film is made, said Moraga of the Insurance Information Network of California.

"Insurers have a lot of control, especially when it comes to completion bonding," he said, "In some cases, if a film gets drastically behind schedule or over budget, the bonding company can take authority to bring the movie back on track. They can reject actors and crews, review scripts, production schedules, production budgets and insurance arrangements," he said.

Paulsen said St. Paul once talked a director out of starting a movie with the entire cast jumping out of an airplane. He declined to identify the film.

"On the cast side, any injury to a major star is a delay in the film. It's substantial money," Paulsen said.

Perhaps it's not as sexy as worrying about stunts, but insurers also work to protect film equipment.

Corrosion of equipment is a threat for films being shot in tropical locations, Paulsen said. A unit consisting of a camera, sound and lighting equipment can cost anywhere from $10,000 to $25,000, and generally several units are used on a film. For one film, St. Paul insisted that the production company build a "clean room," where the cameras and other equipment were checked in to be cleaned at night, before being signed out for the next day's shooting.

"You have to not only think about what they're doing in the film, but where they're shooting it," Paulsen said. "Every film is different. It's part of the fun of underwriting it."

Insure It and They Will Come

Insurers often have to be creative to protect their interests in underwriting a film. For example, in "Field of Dreams" Fireman's Fund guaranteed the corn would be "high as an elephant's eye," Kozero said. The film was shot in the Midwest, where that shouldn't have been a problem. However, a drought hit the Midwest that year, and the corn began to shrivel.

"So we installed an irrigation system," Kozero said. "That still wasn't enough, so we dug a trench in front of it for the actors to stand in, so the corn looked taller. It cost $250,000, but saved us fortunes because production costs can easily run into a quarter a million a day."

For the movie, "A Simple Plan," which was filmed in Minnesota in the winter, producers purchased $2 million in coverage from an undisclosed insurer to hedge against two contingencies: a blizzard, which would hamper production; and a lack of snow, Moraga said.

"They had to be guaranteed a 2-inch blanket of snow for a 40-mile radius of the camera's focal point," Moraga said. "It shouldn't have been a problem in Minnesota, but that was the year of El Nino, and there was no snow in Minnesota at the time of filming. The insurer paid for the cast to move to sites in Wisconsin and Michigan, where there was plenty of snow to meet the requirement."

Moraga said dealing with the personalities of movie stars also can be complicated.

When producers wanted to cast Courtney Love in "The People vs. Larry Flint," the insurer worried about Love's public alcohol and drug abuse problems. "They agreed a representative of the insurer would monitor her on and off the set to ensure she didn't use drugs," Moraga said.

Paulsen said part of his job is watching "Entertainment Tonight" and reading film trade magazines "to find out if there are any drug problems or disciplinary problems. If someone ends up in jail or sick, we pay for that downtime."

He said insurers take such publications "with a grain of salt--it is entertainment. But we need to ask the questions to make sure there's no truth there."

Paulsen said the film insurance will continue to grow.

"Entertainment is always going to be around," Paulsen said. "We think the industry is just going to continue to expand."

Hartwig agreed.

"There's no rival to the U.S. motion picture industry anywhere in the world," Hartwig said. "It's one area where you can still argue the U.S. enjoys nearly a worldwide monopoly, one that will grow indefinitely. Even during the Great Depression, people still wanted to see movies."

Legends of the Fall

Most expensive movie-related insurance claims:

* In 1981, MGM/United Artists filed a claim with Lloyds to recoup the $15 million it had spent on making "Brainstorm," a science fiction movie with a projected budget of $25 million. With just a few weeks of shooting remaining, the movie's star, Natalie Wood, drowned. Rather than pay the entire $15 million, Lloyd's paid $2.75 million to finish the principal photography and another $3.5 million for special effects. The film used body doubles and trick photography for the remaining scenes.

* Fireman's Fund paid $14.5 million to the producers of "Wagons East," when the movie's star, John Candy, died of heart failure with only 80% of the production complete in March 1994.

* CNA paid $8 million to help finish "The Crow" after its star, Brandon Lee, died from wounds inflicted by an improperly loaded prop gun on the set in 1994. CNA helped to pay for script revisions, extra shooting and special effects to patch earlier footage of Lee's face onto stunt doubles.

* CNA International and American Casualty Co. of Reading, Pa., a subsidiary of CNA Insurance Group, paid $5.7 million to the producers to two films that actor River Phoenix had been working on when he died of a drug overdose in 1993.

Hollywood Insurance Can Flop, Too

Axa Corporate Solutions is one insurer that has found the insurance-backed financing of films to be a business too risky to write.

Axa and American International Group Inc. put together a $100 million insurance-backed financing for Destination Film Distribution in October 1998, said Aaron Stern, president and CEO of Axa Corporation Solutions' alternative risk transfer division.

Four months later, Axa fired the executive in charge of the transaction, and decided to exit the business.

"We stopped writing that business in February of 1999," Stern said. "The underwriter who had been accepting these transactions in our facultative division was terminated for violating the terms of his underwriting guidelines."

The insurance policy protected against a short-fall of revenues from films that were to be made by Destination, and was supposed to cover a minimum of 36 films made in three years, Stern said. An additional two years of revenues from the films was to be collected. However, only nine films were ever made, and only six released for distribution, Stern said.

"It has not worked out," Stern said, noting Destination filed for insolvency on Feb. 27. He said Axa has just notified Destination that it will pay about $1.4 million to Destination on April 16.

The company has decided not to get involved with such transactions in the future, Stern said.

"Our subsequent investigation showed the nature of the transaction and the structure of the deals left a virtual certainty that there would be significant losses," Stern said.

In the mid 1990s, several companies began insuring the financial performance of individual pictures, essentially providing collateral for individual film loans. Called "gap finance," insurers promised to pay up if the money that the film made didn't match what the film was insured for, guaranteeing producers would make a profit whether or not the film was a hit at the box office.

By insuring just one film at a time, the risk insurers bore was high. By some accounts, they also underwrote as much as half of a film's total budget costs. Even if the transactions insured more than one film, the policies proved difficult to underwrite and the fallout from some of those deals continues in court today.

Eight insurance firms, including HIH Casualty & General Insurance of Australia--which recently filed for bankruptcy--and Lexington Insurance, a subsidiary of AIG, are suing Chase Manhattan Bank and its agent, Heath Insurance Broking, over a transaction that provided financing for Phoenix Pictures. A London court ruled last summer that the insurers don't have to honor insurance policies written for Phoenix--which made "The People vs. Larry Flint" and "The Mirror Has Two Faces"--if they can prove Chase or Heath misrepresented or failed to disclose material facts before insurers wrote the policies.
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Title Annotation:motion picture industry's need for insurance grows
Comment:Underwriting HOLLYWOOD.(motion picture industry's need for insurance grows)
Author:Green, Meg
Publication:Best's Review
Geographic Code:1USA
Date:May 1, 2001
Previous Article:Strength in Numbers.
Next Article:Falling Markets, Rising Risks.

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