MoneyGram 2007 Annual Report Download - page 35

Table of Contents
percent over 2005 due to higher yields on the portfolio from rising short-term interest rates and the benefit from previously impaired
investments and income from limited partnership interests, but was partially offset by lower average investable balances.
Investment commissions expense in 2007 increased two percent compared to the prior year, reflecting higher commissions paid to
financial institution customers resulting from an increase of 5 basis points in the average federal funds rate over the prior year. Investment
commissions expense in 2006 increased four percent compared to the prior year as rising short-term rates resulted in higher commissions
paid to financial institution customers and increased the amount of the cost of receivables sold. The impact of rising rates in 2006 was
significantly offset by lower swap costs. Lower swap costs are the result of maturing high rate swaps replaced by lower rate swaps,
increases in short-term rates and lower notional swap balances.
The Company had $1.4 billion of outstanding swaps with an average fixed pay rate of 4.3 percent at December 31, 2007, compared to
$2.6 billion with an average fixed pay rate of 4.3 percent at December 31, 2006. Approximately $1.4 billion of swaps matured during
2007. The run off of the lower priced swaps during 2007 increased investment commission expense over the same period in the prior
year. Approximately seven percent of the notional value of our swaps will roll off during the first quarter of 2008. The remaining balance
will roll off beginning in 2009 and continuing through 2012. In the first quarter of 2008, the Company terminated three outstanding
swaps with a notional value of $32.0 million in connection with the sale of the investments related to these swaps.
Net investment revenue decreased 1 percent in 2007 compared to 2006 reflecting the benefit of pre-tax cash flow on previously impaired
investments and income from limited partnerships recorded in 2006 and higher investment commission expense in 2007. Net investment
margin decreased 3 basis points to 2.28 percent in 2007 compared to 2006, reflecting a decrease in net investment revenue and somewhat
offset by an increase in average investable balances. During 2006, net investment revenue increased 14 percent compared to 2005, with
the net investment margin increasing 40 basis points to 2.31 percent. During 2006, the average federal funds rate increased 175 basis
points and the average 5-year U.S. Treasury Note increased 70 basis points. These changes in interest rates are representative of the flat
yield curve environment in which we operated in 2006. During 2005, the average federal funds rate increased 187 basis points and the
average 5-year U.S. Treasury Note increased 62 basis points. The 2006 and 2005 margins benefited from the investment revenue items
discussed above, as well as the lower swap costs.
In January 2008, we commenced a process to realign our investment portfolio away from asset-backed securities into highly liquid assets.
We anticipate the realigned portfolio will be comprised primarily of cash equivalents and government and government agency securities.
In addition, the Company began a restructuring of its official check business model by changing its commission structure and exiting
certain large customer relationships. As a result, we anticipate that our net investment margins will be adversely affected on a going
forward basis by the lower yields in our realigned portfolio. While we expect our commission re-pricing initiatives under the official
check restructuring to substantially offset the impact of the lower yields from the realigned portfolio, we will not know the final results of
the re-pricing initiatives for some time.
Table 4 — Summary of Gains, Losses and Impairments
2007 2006
vs. vs.
YEAR ENDED DECEMBER 31, 2007 2006 2005 2006 2005
(Amounts in thousands)
Gross realized gains $ 5,611 $ 5,080 $ 7,378 $ 531 $ (2,298)
Gross realized losses (2,157) (2,653) (4,535) 496 1,882
Other-than-temporary impairments (1,193,210) (5,238) (6,552) (1,187,972) 1,314
Net securities losses $ (1,189,756) $ (2,811) $ (3,709) $ (1,186,945) $ 898
As shown in Table 4, the Company had a net securities losses of $1.2 billion in 2007 compared to net securities losses of $2.8 million in
2006. The increase in net securities losses is due to $1.2 billion of other-than-temporary impairments recorded in December 2007. See
"Liquidity and Capital Resources — Impact of Credit Market Disruption" for further discussion of the other-than-temporary impairments.
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