Insurance Profits – Investor’s Guide to Health Insurance Profits

Normally, profits are a good way to determine if a company might be worth investing in. There is a huge debate when it comes to insurance profits. There is the camp that embraces the idea that health insurance companies have very little profit. There is the camp that thinks there is something suspicious about those low numbers. Both camps have good points. For the investor it is important to know what profits are really like in order to make sound investments that will be profitable. So health insurance is either a really good idea, or a really bad idea.

According to the numbers, the health insurance industry makes very little money. They rank fairly low among industries of the nation at a little over 3% profit margin. By that number, it looks pretty bleak as far as investing opportunities. This would equate to about $100-$200 per insurance policy. Those who would say that insurance profits are very low also blame the medical industry for over priced services and equipment. Over on the other side, they say that the problem is not with the medical industry, but with the inflated prices of premiums on an insurance policy.

The other camp thinks that the low profit margin has been tampered with. They think that expenses were padded in order to make the profit margin lower. Lower profit margins can result in some benefits with taxes, etc. When insurance executives are pulling multimillions per year, some customers begin to question that profit margin a bit. The jury is still out on who is right. Nobody seems to know for certain which camp has the right idea about insurance profits. But as far as investing goes, it is important to know what is really going on with those profits.

A better measure of whether health insurance is a good investment is to take a look at ROIC or return on invested capital. This completely sets aside the debate on insurance profits and get right to what an investor needs to know. How much of what is invested is returned? Those are the numbers that will be more meaningful to an investor. They could also shed some light on the debate about profit margins. ROIC shows how much it takes to run the insurance company verses how much profit it brings in. The ROIC shows that health insurance is closer to 16% profit.

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