Hartford Financial Services Group (NYSE:HIG), better known as The Hartford, had a good year in 2019, returning a market-beating 36.7% -- but 2020 has been a much stiffer challenge. The coronavirus pandemic and the Federal Reserve's move to cut interest rates to the 0% to 0.25% range have certainly changed the outlook for financial services companies.

Good navigators

The Hartford is an insurance and asset management company. It generates most of its revenue -- about 49% -- from its commercial insurance line. Group benefits make up about 28% of revenue, while personal insurance accounts for around 16%. Revenue from the asset management business only makes up about 4.8% of revenue.

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In the fourth quarter of 2019, the company capped off a strong year, with net income up 186% to $543 million. For the full year, net income rose 15% to $2 billion. In addition, its book value per diluted share was up 25% to $43.85 for the full year. Book value, which measures total assets minus total liabilities, is an important metric for insurance companies, as it shows they have the assets to back up their liabilities or insurance contracts.

The Hartford's combined ratio -- another key metric, which subtracts an insurer's dividends, expenses, and losses from what it earns in premiums -- was 94 in 2019, up 2.5 points from 2018. A combined ratio under 100 shows an insurer is profitable, so that's not bad.

Chairman and CEO Christopher Swift called it a pivotal year for the company as it made a major move to enhance its capabilities.

The big move was the acquisition of the Navigators Group, which closed in the second quarter of 2019. Navigators, which specializes in specialty insurance, will complement Hartford's property and casualty lines. It will also bolster Hartford's presence in the commercial middle-market business. The company sees these two areas delivering solid growth as the company builds out deep product sets and broadens distribution across retail and wholesale channels.

"As the integration progresses, we are seeing more opportunities to improve underwriting profitability, cross-sell products, improve claim processes and leverage all the capabilities of The Hartford platform," Swift said on the fourth-quarter earnings call. The company expects $200 million of earnings over the next few years from the acquisition.

The major variable is interest rates, which dropped unexpectedly in the first quarter of 2020 to the zero-bound.

Strong headwinds

The interest-rate environment has generated some gusty headwinds for The Hartford. Last year, despite three straight interest-rate reductions in the third quarter, net investment income was up about 9% to $1.7 billion. It was primarily driven by the acquisition of Navigators, growth of property and casualty assets, higher returns on investments, and a lower loss ratio in group benefits.

"Currently, our portfolio continues to perform well, but it is clear that the interest rate environment is becoming more challenging. This will impact the investment returns on new cash flows, reinvestment rates and our overall portfolio yield. The implication is that net investment income will likely become a headwind to core earnings growth, requiring higher levels of underwriting income to support earnings and ROE," Swift said on the earnings call, before the rates were reduced to zero.

What's the outlook?

The Hartford's stock price is down about 31% year to date, which lags behind the S&P 500. There's a lot to like about The Hartford, including its valuation and its dividend, which it increased 6% to $0.32 per share in the first quarter, but this is a challenging environment for the insurance industry.

In its Global Macro and Insurance Outlook for the first quarter, the Insurance Information Institute said there are three factors that will impede insurance companies. The decrease in global GDP will negatively affect premium growth, claims will increase due to the disease, and lower interest rates will drive return on equity down.

These factors make it difficult to recommend buying insurance stocks right now, including The Hartford. It will be interesting to see how the company adjusts its outlook when it reports first-quarter earnings later this month.