The Risks Of Investing In Aviva plc

Today I am highlighting what you need to know before investing in Aviva (LSE: AV) (NYSE: AV.US).aviva

Europe on the slide?

A backcloth of improving economic conditions, allied with extensive self-help measures, has helped Aviva to put to bed the horrors of the 2008/2009 financial crisis and get revenues moving higher once more. But batches of worrying data from Europe in recent weeks has cast doubt over whether the group could see business volumes from the region plough through the floor again.

Trade from its continental partners represents a huge deal for the company, and during January-June almost a quarter of all new business values came from France alone, at some £110m. The company has witnessed a terrific turnaround in Europe of late, with values in Spain and Italy rising 67% and 49% correspondingly during the first half, and the total in France rising by 23% from the same 2013 period.

Still, great uncertainty still surrounds the state of the eurozone economies and the potential for significantly-reduced inflows. Just today economic sentiment in the currency bloc fell to a 10-month nadir of 99.9 in September, not a huge surprise given fears over a worsening deflationary spiral, falling private sector activity and stubbornly-high unemployment levels which could all affect sales in the coming months and years.

Aviva is embarking on massive streamlining of its businesses in Europe, including the disposal of its CxG Aviva Spanish joint venture for £226m just this month. But its still considerable presence could put paid to the stratospheric growth seen in recent time and even prompt contagion across its core UK and Irish units.

… while VAT ruling strikes tax expenditure

Meanwhile Aviva has also been whacked by news this month that the tax bill related to its European operations is also set to head north.

Following a courtroom battle between Swedish insurance giant Skandia and the country’s tax authorities, the European Court of Justice ruled that banks and insurance companies must charge VAT on services supplied between a company’s headquarters and its cross-border subsidiaries.

Previously these operations were not subject to the 20% hike, a scenario likely to create a huge dent on balance sheets across the financial services sector.

Because the rules do not relate to VAT-exempt products which banks and insurers sell, and are rather passed on as an operating cost, the likes of Aviva will be unable to claw back these colossal sums, adding a further layer of pressure should revenues head south.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.