MoneyGram 2005 Annual Report Download - page 40

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Table of Contents
Table 13 — Interest Rate Sensitivity Analysis
Basis Point Change in Interest Rates
Down Down Down Up Up Up
200 100 50 50 100 200
(Dollars in thousands)
Pre-tax income from continuing operations $ 3,500 $ 2,900 $ 1,900 $ (3,300) $ (5,600) $ (10,100)
Percent change 2.1% 1.8% 1.2% (2.0%) (3.5%) (6.2%)
Market value of equity $ 148,500 $ 88,700 $ 48,900 $ (57,100) $ (124,500) $ (265,100)
Percent change 24.3% 14.5% 8.0% (9.3%) (20.4%) (43.4%)
Credit Risk
Credit risk represents the potential risk that the Company may not collect on interest and/or principal associated with its investments, as well as counterparty
risk associated with its derivative financial instruments. The Company is also exposed to the potential risk that the Company may not collect on funds
received by agents in connection with money transfers and money orders.
Approximately 83 percent of the Company's investment portfolio at December 31, 2005 consists of securities that are not issued or guaranteed by the
U.S. government. If the issuer of any of these securities or counterparties to any of our derivative financial instruments were to default in payments or
otherwise experience credit problems, the value of the investments and derivative financial instruments would decline and adversely impact our investment
portfolio and earnings. As it relates to the investment portfolio, the Company's strategy is to maximize the relative value versus return on each security, sector
and collateral class. The Company uses a comprehensive process to manage its credit risk relating to investments, including active credit monitoring and
quantitative sector analysis. The Company also addresses credit risk by investing primarily in investments with ratings of A3/A- or higher or which are
collateralized by federal agency securities, as well as ensuring proper diversification of the portfolio by limiting individual investments to one percent of the
total portfolio. Approximately 85 percent of the Company's investment portfolio at December 31, 2005 consists of securities with an A or better rating. The
Company manages its credit risk related to its derivative financial instruments by entering into agreements only with major financial institutions and regularly
monitoring the credit ratings of these financial institutions.
Due to the nature of our business, the vast majority of our Global Funds Transfer business is conducted through independent agents. Our agents receive the
proceeds from the sale of our payment instruments and we must then collect these funds from the agents. As a result, we have credit exposure to our agents,
which averages approximately $1,100 million, representing a combination of money orders, money transfers and bill payment proceeds. This credit exposure
is spread across almost 27,500 agents, of which 14 owe us in excess of $15.0 million each at any one time. Agents typically have from one to three days to
remit the funds, with longer remittance schedules granted to international agents and certain domestic agents under certain circumstances. The Company
assesses the creditworthiness of each potential agent before accepting it into our distribution network. The Company actively monitors the credit risk of active
agents on an on-going basis by conducting periodic comprehensive financial reviews and cash flow analysis of our agents who average high volumes of
money order sales. In addition, the Company frequently takes additional steps to minimize agent credit risk, such as requiring owner guarantees, corporate
guarantees and other forms of security where appropriate. The Company monitors remittance patterns versus reported sales by agent on a daily basis. The
Company also utilizes software embedded in each point of sale terminal to control both the number and dollar amount of money orders sold. This software
also allows the Company to monitor for suspicious transactions or volumes of sales, assisting the Company in uncovering irregularities such as money
laundering, fraud or agent self-use. Finally, the Company has the ability to remotely disable money order dispensers or transaction devices to prevent agents
from issuing money orders or performing money transfers if suspicious activity is noted or remittances are not received according to the agent's contract. The
point of sale software requires each location to be re-authorized on a daily basis for transaction processing.
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