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AMP smashed on earnings downgrade

AMP (ASX: AMP) is not only one of Australia’s largest fund managers with one of the largest financial planning networks. It’s also a major provider of insurance products.

And it was this insurance division which was the focus of today’s earnings update. In the announcement, the company blamed “poor claims and lapse experience in its Australian wealth protection business” as the major contributing factor to the downgrade.

AMP also highlighted that “the industry is experiencing increased pressure on insurance claims and policy lapses” as well as noted “a lower result in wealth management relative to market expectations”.

On the basis of these factors, management provided earnings guidance for underlying first half profit in the range of $415 million to $435 million, which compares to an underlying profit for the first half of 2012 of $491 million. The shares are currently trading down some 10% on the news.

AMP, along with fellow insurers Insurance Australia Group (ASX: IAG) and Suncorp Group (ASX: SUN) have been on a great run over the past 12 months. As the chart below shows, all three insurers have vastly outperformed the S&P/ASX 200 index (Index: ^AXJO) (ASX: XJO).

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Foolish takeaway

AMP’s market update is important as it could be a bellwether for other insurance related companies, although AMP is significantly skewed towards wealth and income insurance — not property and casualty. The announcement could also be a bellwether for fund manager earnings too.

With the sector having run hard, it might be time for investors to consider whether financial stocks in their portfolio are overvalued and potentially vulnerable.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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