Western Union 2007 Annual Report Download - page 45

Management’s Discussion and Analysis of Financial Condition and Results of Operations
43
A hypothetical uniform 100 basis point increase in interest
rates would result in a decrease to pretax income of approximately
$9.1 million annually based on borrowings on December 31,
2007 that are sensitive to interest rate fl uctuations. The same
100 basis point increase in interest rates, if applied to our cash
and investment balances on December 31, 2007 that are sensitive
to interest rate fl uctuations, would result in an offsetting benefi t
to pre-tax income of approximately $16.7 million annually. There
are inherent limitations in the sensitivity analysis presented,
primarily due to the assumption that interest rate changes would
be instantaneous. As a result, the analysis is unable to refl ect the
potential effects of more complex market changes that could
arise, including changes in credit risk regarding our investments,
which may positively or negatively affect income. In addition the
current mix of fi xed versus fl oating rate debt and investments
and the level of assets and liabilities will change over time.
Credit Risk
The Company’s interest earning assets include money market
fund investments, which are classifi ed in “cash and cash equiva-
lents,” and investment securities, substantially all of which are
highly-rated state and municipal debt instruments, which are
classifi ed in “settlement assets” and accounted for as available-
for-sale securities. Credit risk is signifi cantly mitigated in the
money market funds by both the short duration of the funds, as
well as the diversifi cation provided by the fund format. Substan-
tially all of our investment securities are rated “AA-” or better
from a major credit rating agency. The Company is actively
monitoring these positions in light of recent credit market events
in the United States and abroad. Given the nature of the Company’s
portfolio, we do not expect signifi cant impacts to our portfolio.
During the year ended December 31, 2007, we did not incur
any impairment charges on our interest earning assets.
Regulatory
Our business is subject to a wide range of laws and regulations
enacted by the United States federal government, each of the
states, many localities and other countries. These include fi nancial
services regulations, consumer disclosure and consumer protec-
tion laws, currency control regulations, money transfer licensing
regulations, escheat laws and laws covering consumer privacy,
data protection and information security. Our services also are
subject to an increasingly strict set of legal and regulatory require-
ments intended to help detect and prevent money laundering,
terrorist fi nancing and other illicit activity. Failure to comply with
any of these requirements — by either Western Union or its agents
(who are third parties, over whom Western Union has limited
legal and practical control) — could result in the suspension or
revocation of a license or registration required to provide money
transfer services, the limitation, suspension or termination of
services, and/or the imposition of civil and criminal penalties,
including fi nes. We continue to implement policies and programs
and adapt our business practices and strategies to help us
comply with current and evolving legal standards and industry
practices. These programs include dedicated compliance per-
sonnel, training and monitoring programs, suspicious activity
reporting, and support and guidance to our agent network on
regulatory compliance.