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Venezuelan nationalization drive may trigger political risk claims

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Venezuelan nationalization drive may trigger political risk claims

CARACAS, Venezuela—If President Hugo Chavez keeps his promise to nationalize utility companies and oil investments in Venezuela, political risk coverage claims may follow.

Claims could take months to materialize. Much will hinge on how President Chavez carries out his plans and whether he adequately pays investors for their financial loss or simply confiscates the properties, political risk observers add.

President Chavez, first elected in 1998, was sworn in earlier this month for a third term.

After his 20-point margin of victory, President Chavez continues to press ahead with his goal of transforming Venezuela into a state that is more closely tied to a socialist model. He announced earlier this month that he plans to nationalize entities such as Compania Anonima Nacional Telefonos de Venezuela, the South American nation's biggest telecommunications company.

According to Securities and Exchange Commission documents, New York-based Verizon Communications Inc. owns 28% of CANTV's stock. A spokesman for Verizon said the company did not know the details of President Chavez's plan and could not comment.

Along with demanding congressional authority to aid in his nationalization drive, President Chavez recently announced his intention to nationalize La Electricidad de Caracas. Arlington, Va.-based electricity provider AES Corp. owns a controlling share of EDC, a third-quarter 2006 AES report shows.

AES did not return phone calls seeking comment.

The Venezuelan president also said that oil production projects, in which some of the world's largest oil companies have invested billions of dollars, should become state property. The government last year began negotiations with oil companies to take a majority stake in those projects, but a deal has not been reached.

Some of the entities in President Chavez's sights likely carry political risk coverage, according to insurers and brokers.

But coverage would be triggered only if investors are not adequately compensated for their financial losses, said Daniel W. Riordan, executive vp and managing director of emerging market solutions for Zurich Financial Services Group in Washington.

Some observers say it is unlikely President Chavez would take the companies without providing some compensation from Venezuela's sizable oil revenues.

"The government at the present time has a lot of money, so making payments won't be a big problem," said Rafael Malaret, managing director for Seguransa Meta C.A., an insurance brokerage in Caracas.

Also, Venezuelan law requires the country to compensate investors. "No doubt they will pay in cases of nationalization," he said.

But in such situations, governments usually don't adequately compensate investors, said Keith Dunford, worldwide underwriting manager for political risk in Whitehouse Station, N.J., for the Chubb Corp.

Should that happen, political risk insurers would make up the balance. The actual amount they contribute would likely result from a settlement between insurers and policyholders, said Bryan Squibb, managing director for Aon Trade Credit in Chicago.

"These claims are not cut and dried like a car accident" claim, Mr. Squibb said. "It might be they go on for months, if not years."

It also may not be in a policyholder's interest to walk away from the country and file an insurance claim, Mr. Squibb said. They may want to continue some operations in Venezuela while still attempting to salvage their investments, he said.