Motion Picture Finance Insurance
Background to Motion Picture Financing Insurance
The credits that appear at the end of a Motion Picture provide a flavour of just how much goes in to producing a Motion Picture, the number of people involved and how much money is required to complete the production. The cost of cast, crew, materials, insurance, legal fees and marketing are high. As a rule of thumb, a Motion Picture must gross two to three times its budget to net an amount for the production financier’s to break even. A very small percentage of Motion Pictures recoup 100% of their production financing.
Production companies are typically single purpose vehicles with no real assets other than copyright they create by producing a Motion Picture. This copyright, however, does have value. The Motion Picture can be licensed throughout the world and in a multitude of media generating a stream of revenue. Further, included in the copyright are music, merchandise, sequel, television and a number of additional rights that might have value. In order to produce the Motion Picture, the production company requires some source of financing, some or all of which must be available at the outset. A number of sources of funding are available to production companies including the presales (or licensing) of all or part of the copyright to licensees, personal funds, private investors, loans, grants, and tax credits or incentives supporting the production of motion pictures. The majority of Motion Pictures are fully financed prior to commencing production and depending on how the financing has been structured, there are a number of banks that are experienced in this industry and prepared to lend the production financing to the production company against the security of the copyright and other collateral provided by the production company.
In some circumstances, however, particularly in cases of independent or lower budget Motion Pictures (e.g. motion pictures with budgets under $15M) where, for example, the cast may not be sufficiently well known to guarantee large levels of pre-sales, the Motion Picture production is not fully financed and absent 100 per cent security banks will, as a general rule, not lend what the producer needs; banks rarely lend against a gap because that would involve them lending against the risk of the Motion Picture not selling, which is not a risk most banks are prepared to take.
Banks are naturally risk-averse and seek security for any risk they assume. Motion Picture financing is a risky business particularly because production companies tend to have no assets to guarantee repayment. In an attempt to resolve this conflict and to provide production companies with an opportunity to obtain financing, an insurance policy was designed under the terms of which insurers agree to pay the bank’s loss in the event that the Motion Picture fails to generate sufficient money to repay the loan within a defined period. This is known as ‘gap’ or ‘shortfall’ Motion Picture insurance.
Gap insurance policies were written extensively in the London market throughout the 1990s. The premium for this insurance was generally between 9-12 per cent of the sum insured. Towards the end of the 1990s, however, the Motion Pictures that had been insured failed to recoup and the financing banks made claims under these insurance policies. Sales agents struggled to sell the “insured” Motion Pictures, the contractual periods during which the production company was expected to recover its production costs expired and insurers were presented with claims by banks and production companies for payment under the gap insurance policies. Insurers resisted payment on a number of legal grounds and litigation ensued eventually resulting in payment by the insurers to the insured (e.g. financing banks).
Through this experience, the structure of Motion Picture financing insurance has changed from the 1990’s model that financed +$700M of motion picture during the 1990s. Today, there is an opportunity to rebuild the market through a more sensible (and less) risk model putting the insurer (and the insured) on a surer footing. The biggest difference is the requirement of distribution (e.g. the primary source of revenue and repayment to the insured without making a claim on the insurance). Unlike the 1990’s, if the insureds are required to have distribution in place, the speculative element that existed in the 1990’s, namely, whether or not the motion picture would “sell” or be “commercial” enough at delivery to generate sufficient revenues to take the insurer off risk (e.g. the insured’s loan is repaid through revenues rather than by a claim on the insurance policy).
The basic elements have remained largely the same. The financiers generally use a broker to place the insurance and the broker receives a broking fee. The insurers appoint a risk manager whose role will vary. Briefly, the risk manager carries out an initial investigation of the risk to be insured (including a review of the estimated revenues including existing sales and expected sales of the completion motion picture) and makes a recommendation to insurers. Thereafter, he continues to manage the risk generally and receives a fee (usually a percentage of the insurance premium).
As part of obtaining Motion Picture financing, production companies are typically required by their lenders to obtain a completion bond from an acceptable completion guarantor which names the lenders and distributors as beneficiaries. The completion guarantor guarantees the completion and delivery of the Motion Picture by a certain date and within an agreed budget. If the Motion Picture cannot be completed for the agreed budget cost, the completion guarantor must pay the additional costs needed to complete and deliver the Motion Picture by the agreed delivery date. If the completion guarantor fails to complete and deliver the Motion Picture on time (extensions can and are often negotiated as it is in the interests of parties to balance the tension between a Motion Picture’s completion deadline and the desire for artistic quality), the completion guarantor must pay the financiers and distributors an amount equal to the amount loaned to the production company. The financing bank is therefore protected pre-delivery. The completion bond fee is about 5-6 per cent of the Motion Picture’s budget. Once the Motion Picture is delivered to the sales agent or distributor, the insurance cover commences. The policies define a period within which the sales agent has an opportunity to sell the Motion Picture and secure the revenue required for repayment of the production company’s loan. The way in which the revenue generated by sales of the Motion Picture is to be applied varies from transaction to transaction. Upon expiry of the defined contractual period post-delivery, the insured (usually the financing bank) is entitled to claim any shortfall in the revenue received under the insurance policy.
Under the terms of the shortfall insurance policies, the underwriters do not generally assume risk until the Motion Picture has been delivered by the production company and its completion bonder to the distributor or sales agent. The date itself may be expressed to be a condition precedent to insurers’ liability, or (more usually) nothing may be said about the importance of the date to insurers.
Any definition of what is meant by ‘delivery’ is generally found in the sales agency/distribution agreements (to which insurers are not a party) which will also contain a detailed mechanism for resolving disputes over delivery, including disputes over the quality and quantity of materials delivered, and the date of their delivery. Essentially, it’s creation of all the elements required to fully and completely exploit the motion picture.
In practice, virtually all Motion Pictures delivered after the specified dates are accepted late by the sales agent or distributor. He is entitled to reject the materials, but very rarely does as his interest lies in getting the product to market, to see if it will sell and/or to fulfill existing contractual obligations.
Insurers argue that if the Motion Picture is delivered late they are off risk. The actual date for delivery is so important that it amounts to a condition precedent and unless the insurers themselves consent to an extension of time, any lateness in delivery means that they are off risk. This applies even if the sales agent has accepted late delivery, or the risk manager to insurers knows of it and doesn’t complain. Expedite Re will issue policies based on coverage provided in the 1990’s but at higher rates and firm conditions president in order to avoid future disputes that resonated in the 1990’s . Each position will be securitized by supporting banks to the programme along with a profit commission position on the success of each motion picture insured.
Critical Underwriting Points:
1) Underwriters will work on the agreement via a slate of films will be forth coming from the disrubutor and or marketing producing team.
2) Evidence is provided that the Films are presold to the distribution agents and or Cinema chains .
3) Policy period will be over a 60 month duration in order to allow the distribution companies to maximize income through Cinema chains, CD sales and on line sale through, itunes , Netflix and other entities in this space .
4) Underwriters will preagree via fund control agreements of budgets and or sinking funds in order to streamline funding for either thre Sales Agent and or Film Funders.