We have upgraded our recommendation on CNO Financial Group Inc. ( CNO - Analyst Report ) to ‘Outperform’ based on its latest recapitalization plan. Improved credit ratings, strong investment portfolio and declining expenses are the other positives.

CNO Financial reported second-quarter 2012 earnings of 20 cents per share, handily beating the Zacks Consensus Estimate of 17 cents as well as the year-ago earnings of 15 cents. Operating income in the quarter was $54.2 million, up 22% from $44.5 million in the second quarter of 2011.

Promptly acting on a favorable capital market condition, CNO Financial publicized a recapitalization plan earlier this month. This plan aims to improve the company’s capital structure, boost its financial flexibility and enhance the growth rate of earnings per share and return on equity. The debt maturity profile of the company is also expected to improve as a result of the refinancing activities. Further, the cost of debt is anticipated to reduce by 160 basis points after the completion of the recapitalization.

CNO Financial also actively manages its capital to boost shareholders’ value. The company is expected to buyback shares worth $150–$170 million in 2012 and to spend almost $200–$275 million on dividend payments. Moreover, the value of CNO Financial’s investment portfolio is steadily increasing. It escalated to $26.36 billion in 2011 from $23.78 billion in 2010, $21.53 billion in 2009 and $18.65 billion in 2008. The value of the investment portfolio increased further to $27.45 billion in the first half of 2012.

However, the top-line performance of the Bankers Life segment has been deteriorating over the years. The revenues and premium collections of the segment declined considerably from 2008 to 2010. Although collections remained almost flat year-over-year in 2011, these again declined 8.4% in the first half of 2012. Absence of an immediate solution to arrest this critical decline could start pressurizing the company’s bottom line.

Moreover, CNO Financial has to make high principal and interest payments on its outstanding indebtedness. The company requires significant amounts of cash each year to fund its operations and repay debt, which reduced cash in 2011 and in the first half of 2012. The company is expected to require $109 million in cash to service the debt in the current year. This increases the financial risk of the company and may also make additional borrowing costly in the future.

CNO Financial, which competes with AFLAC Inc. ( AFL - Analyst Report ) and Torchmark Corp. ( TMK - Analyst Report ) , currently carries a short-term Zacks #2 Rank (Buy).