Is the Aviva share price a bargain at a P/E ratio of 9?

insurance company Aviva (LSE: AV) looks like a potential bargain at the moment. The price-earnings ratio (P/E) of Aviva shares is just 9.

When I see a blue-chip company with a P/E ratio in the single digits, it can catch my attention. However, since this is only a valuation metric, it is important as an investor to take a comprehensive look at a company’s valuation.

The returns are inconsistent

First of all, what is this P/E ratio based on?

Last year Aviva’s basic earnings per share were 37.7p. However, last year the company reported negative basic earnings per share of -34.7p. The year before had been positive, but at 5.85p it was well below what was achieved last year. It’s clear that Aviva’s earnings can fluctuate significantly, meaning the P/E ratio may be a less useful valuation tool here than for some other companies.

As an insurance company, differences in underwriting results from one year to the next can impact the bottom line. For example, an unusually devastating storm may occur. Additionally, changes in the value of an insurance company’s investments can also affect its profitability in a given year.

However, in the long term I am optimistic about Aviva’s commercial prospects. Demand for insurance is expected to remain strong, the company’s brands are well known, the company has a customer base of almost 20 million (nearly 5 million UK customers have multiple policies with the company) and the increased focus on core markets in recent years has helped streamline what were once sprawling markets business.

Lots to like, but also some risks

The business is still cumbersome, but it’s a powerful money-making machine. In the first half of this year, for example, the company made an operating profit of £875 million. General insurance premiums were over £6 billion in the six-month period.

Aviva cut its dividend a few years ago but has since increased it again.

The interim distribution rose by 7%. The dividend yield is now 7.4%, which corresponds to a blue chip FTSE 100 I find shops like this attractive.

However, insurance is a difficult business and there are always risks as rivals Direct line‘s very mixed performance in recent years has shown.

Premium prices have changed significantly in the UK and Ireland in recent years. This has worked to the advantage of underwriters, but I also see room for a downward trend if a company tries to win business through more aggressive price competition. Given the importance of the UK market to Aviva’s overall performance, I see this as a risk for the company.

But I think investors should think about reacting to the current Aviva share price. I think it represents good value for a company with a long growth outlook, a proven business model, a generous dividend and a focused business strategy.