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UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C.20549

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FORM 10-Q

[X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterlyperiod ended March 31, 2005

OR

[  ]    TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For thetransition period from________ to________.

Commission File Number:001-32307

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|                                                               |  |                                     |  |  |  |  |
|---------------------------------------------------------------|--|-------------------------------------|--|--|--|--|
| **PrimusGuaranty, Ltd.**                                      |
| (Exact name of registrant asspecified in its charter)         |
| **Bermuda**                                                   |  | **NotRequired**                     |
| (State or other jurisdiction ofincorporation or organization) |  | (I.R.S. Employer IdentificationNo.) |
| **ClarendonHouse 2 Church Street Hamilton HM 11, Bermuda**    |
| (Address of principal executive offices, including zipcode)   |
| **441-296-0519**                                              |
| (Registrant's telephone number, including areacode)           |
|                                                               |

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Indicateby check mark whether the registrant (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period thatthe registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.Yes      No  

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act). Yes      No  

As of May 10, 2005, the number of shares outstanding of theissuer's common stock, $0.08 par value, was43,118,904.

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Primus Guaranty,Ltd. Form 10-QFor the quarter ended March 31,2005

|            |  |                                                                                               |    |        |        |        |  |  |  |  |
|------------|--|-----------------------------------------------------------------------------------------------|----|--------|--------|--------|--|--|--|--|
| PartI.     |  | FinancialInformation                                                                          |    |   |   |   |
| Item1.     |  | FinancialStatements                                                                           |    |   |   |   |
|       |  | ConsolidatedStatements of Financial Condition March 31, 2005 (Unaudited) andDecember 31, 2004 |    |   | 3      |   |
|       |  | ConsolidatedStatements of Income (Unaudited) Three months ended March 31, 2005and 2004        |    |   | 4      |   |
|       |  | ConsolidatedStatements of Cash Flows (Unaudited) Three months ended March 31,2005 and 2004    |    |   | 5      |   |
|       |  | Notes toConsolidated Financial Statements                                                     |    |   | 6      |   |
| Item2.     |  | Management's Discussion and Analysis of FinancialCondition and Results of Operations          |    |   | 17     |   |
|       |  | Cautionary Statement Regarding Forward LookingInformation                                     |    |   | 26     |   |
| Item 3.    |  | Quantitativeand Qualitative Disclosures about Market Risk                                     |    |   | 27     |   |
| Item 4.    |  | Controls and Procedures                                                                       |    |   | 28     |   |
| Part II.   |  | OtherInformation                                                                              |    |   |   |   |
| Item 1.    |  | LegalProceedings                                                                              |    |   | 28     |   |
| Item 2.    |  | Unregistered Sales of Equity Securities and Use ofProceeds                                    |    |   | 28     |   |
| Item 3.    |  | Defaults uponSenior Securities                                                                |    |   | 29     |   |
| Item 4.    |  | Submission of Matters to a Vote of SecurityHolders                                            |    |   | 29     |   |
| Item 5.    |  | OtherInformation                                                                              |    |   | 29     |   |
| Item 6.    |  | Exhibits                                                                                      |    |   | 29     |   |
| Signatures |  |                                                                                          | 29 |   |
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2

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PartI.    Financial InformationItem 1.    FinancialStatements

Primus Guaranty, Ltd. ConsolidatedStatements of Financial Condition(dollars in 000s except pershareamounts)

|                                                                                                                                                                         |  |              |         |                 |  |        |         |        |  |  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--------------|---------|-----------------|--|--------|---------|--------|--|--|
|                                                                                                                                                                    |  | March31,2005 |         | December31,2004 |
|                                                                                                                                                                    |  | (unaudited)  |         |            |
| **Assets**                                                                                                                                                              |  |         |    |            |  |   |    |   |
| Cashand cashequivalents                                                                                                                                                 |  | $            | 349,627 |            |  | $      | 320,989 |   |
| Short-terminvestments                                                                                                                                                   |  |         | 133,606 |            |  |   | 161,101 |   |
| Accruedinterestreceivable                                                                                                                                               |  |         | 2,128   |            |  |   | 1,381   |   |
| Accruedpremiums on creditswaps                                                                                                                                          |  |         | 3,162   |            |  |   | 3,349   |   |
| Premiumsreceivable on creditswaps                                                                                                                                       |  |         | 185     |            |  |   | 197     |   |
| Premiums receivable onfinancial guarantees                                                                                                                              |  |         | 700     |            |  |   | 800     |   |
| Assetmanagement feereceivable                                                                                                                                           |  |         | 32      |            |  |   | 15      |   |
| Prepaidexpenses                                                                                                                                                         |  |         | 715     |            |  |   | 868     |   |
| Unrealized gain oncredit swaps, at fairvalue                                                                                                                            |  |         | 31,017  |            |  |   | 46,517  |   |
| Fixed assets,less accumulated depreciation of $559 in 2005 and $493 in2004                                                                                              |  |         | 1,744   |            |  |   | 1,800   |   |
| Internal usesoftware costs, less accumulated amortization of $6,342 in 2005 and$5,893 in 2004                                                                           |  |         | 4,014   |            |  |   | 4,297   |   |
| Incometax receivable                                                                                                                                                    |  |         | 279     |            |  |   | 279     |   |
| Debt issuancecosts                                                                                                                                                      |  |         | 1,143   |            |  |   | 1,125   |   |
| Totalassets                                                                                                                                                             |  | $            | 528,352 |            |  | $      | 542,718 |   |
| **Liabilitiesand shareholders'equity**                                                                                                                                  |  |         |    |            |  |   |    |   |
| Accounts payable andaccruedexpenses                                                                                                                                     |  | $            | 1,691   |            |  | $      | 904     |   |
| Compensationpayable                                                                                                                                                     |  |         | 1,455   |            |  |   | 5,317   |   |
| Brokerage feespayable                                                                                                                                                   |  |         | 19      |            |  |   | 14      |   |
| Current state andlocal taxes payable                                                                                                                                    |  |         | 46      |            |  |   | 12      |   |
| Interestpayable                                                                                                                                                         |  |         | 353     |            |  |   | 364     |   |
| Long-termdebt                                                                                                                                                           |  |         | 75,000  |            |  |   | 75,000  |   |
| Unrealized losson credit swaps, at fairvalue                                                                                                                            |  |         | 4,292   |            |  |   | 259     |   |
| Deferred rentpayable                                                                                                                                                    |  |         | 450     |            |  |   | 455     |   |
| Deferred financialguarantee premiums                                                                                                                                    |  |         | 707     |            |  |   | 806     |   |
| Deferredcredit swappremiums                                                                                                                                             |  |         | 63      |            |  |   | 69      |   |
| Totalliabilities                                                                                                                                                        |  |         | 84,076  |            |  |   | 83,200  |   |
| Preferredsecurities ofsubsidiary                                                                                                                                        |  |         | 98,521  |            |  |   | 98,521  |   |
| Shareholders'equity:                                                                                                                                                    |  |         |    |            |  |   |    |   |
| Common stock, $0.08par value, 62,500,000 shares authorized, 43,062,428 and 42,780,033shares issued and outstanding at March 31, 2005 and December 31, 2004,respectively |  |         | 3,533   |            |  |   | 3,535   |   |
| AdditionalPaid-in-Capital                                                                                                                                               |  |         | 263,474 |            |  |   | 264,860 |   |
| Warrants                                                                                                                                                                |  |         | 612     |            |  |   | 612     |   |
| Retainedearnings                                                                                                                                                        |  |         | 78,136  |            |  |   | 91,990  |   |
| Totalshareholders'equity                                                                                                                                                |  |         | 345,755 |            |  |   | 360,997 |   |
| Totalliabilities, preferred securities of subsidiary and shareholders'equity                                                                                            |  | $            | 528,352 |            |  | $      | 542,718 |   |
|                                                                                                                                                                         |

Seeaccompanying notes.

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Primus Guaranty, Ltd. ConsolidatedStatements of Operations(amounts in 000s except per shareamounts)

|                                                   |  |                           |         |         |  |        |         |         |  |  |
|---------------------------------------------------|--|---------------------------|---------|---------|--|--------|---------|---------|--|--|
|                                              |  | ThreeMonths EndedMarch31, |
|                                              |  | 2005                      |         | 2004    |
|                                              |  | (unaudited)               |
| **Revenues**                                      |  |                      |    |    |  |   |    |    |
| Netcredit swaprevenue                             |  | $                         | (8,198  | )  |  | $      | (3,030  | )  |
| Premiumsearned on financialguarantees             |  |                      | 99      |    |  |   | 99      |    |
| Interestincome                                    |  |                      | 3,693   |    |  |   | 652     |    |
| Rentalincome                                      |  |                      | — |    |  |   | 27      |    |
| Asset managementfees                              |  |                      | 42      |    |  |   | — |    |
| Foreign currencyrevaluation                       |  |                      | (564    | )  |  |   | (73     | )  |
| Totalnetrevenues                                  |  |                      | (4,928  | )  |  |   | (2,325  | )  |
| **Expenses**                                      |  |                      |    |    |  |   |    |    |
| Employeecompensation andbenefits                  |  |                      | 5,196   |    |  |   | 3,423   |    |
| Professionaland legal fees                        |  |                      | 954     |    |  |   | 415     |    |
| Fixed assetdepreciation andamortization           |  |                      | 516     |    |  |   | 474     |    |
| Technology anddatafeeds                           |  |                      | 317     |    |  |   | 307     |    |
| Rent                                              |  |                      | 190     |    |  |   | 173     |    |
| Bankfees                                          |  |                      | 180     |    |  |   | 84      |    |
| Rating agencyfees                                 |  |                      | 71      |    |  |   | 63      |    |
| Brokerageexpense                                  |  |                      | 34      |    |  |   | 218     |    |
| Interestexpense                                   |  |                      | 493     |    |  |   | — |    |
| Other                                             |  |                      | 290     |    |  |   | 166     |    |
| Totalexpenses                                     |  |                      | 8,241   |    |  |   | 5,323   |    |
| Distributionson preferred securities ofsubsidiary |  |                      | 649     |    |  |   | 542     |    |
| Lossbefore provision for incometaxes              |  |                      | (13,818 | )  |  |   | (8,190  | )  |
| Provision forincometaxes                          |  |                      | (36     | )  |  |   | (72     | )  |
| **Netloss available to commonshares**             |  | $                         | (13,854 | )  |  |   | (8,262  | )  |
| Lossper commonshare:                              |  |                      |    |    |  |   |    |    |
| Basic                                             |  | $                         | (0.32   | )  |  | $      | (3.21   | )  |
| Diluted                                           |  | $                         | (0.32   | )  |  | $      | (3.21   | )  |
| Averagecommon sharesoutstanding:                  |  |                      |    |    |  |   |    |    |
| Basic                                             |  |                      | 43,213  |    |  |   | 2,570   |    |
| Diluted                                           |  |                      | 43,213  |    |  |   | 2,570   |    |
|                                                   |

Seeaccompanying notes.

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Primus Guaranty, Ltd. ConsolidatedStatements of Cash Flows(dollars in 000s except per shareamounts)

|                                                                               |  |                           |         |         |  |        |         |         |  |  |
|-------------------------------------------------------------------------------|--|---------------------------|---------|---------|--|--------|---------|---------|--|--|
|                                                                          |  | Threemonths endedMarch31, |
|                                                                          |  | 2005                      |         | 2004    |
|                                                                          |  | (unaudited)               |
| **Cashflows from operatingactivities**                                        |  |                      |    |    |  |   |    |    |
| Netloss                                                                       |  | $                         | (13,854 | )  |  | $      | (8,262  | )  |
| Adjustmentsto reconcile net loss to net cash provided by operatingactivities: |  |                      |    |    |  |   |    |    |
| Non-cashitems included in net income(loss):                                   |  |                      |    |    |  |   |    |    |
| Depreciation offixedassets                                                    |  |                      | 66      |    |  |   | 54      |    |
| Amortization ofinternal use software costs                                    |  |                      | 450     |    |  |   | 420     |    |
| Stock compensation                                                            |  |                      | 982     |    |  |   | 491     |    |
| Net unrealized loss oncredit swapportfolio                                    |  |                      | 19,533  |    |  |   | 14,474  |    |
| Unrealizedloss onsublease                                                     |  |                      | — |    |  |   | (5      | )  |
| Deferredrent                                                                  |  |                      | (5      | )  |  |   | (4      | )  |
| Amortization ofdebt issuancecosts                                             |  |                      | 12      |    |  |   | — |    |
| Distributionson preferred securities ofsubsidiary                             |  |                      | 649     |    |  |   | 542     |    |
| Increase(decrease) in cash resulting from changesin:                          |  |                      |    |    |  |   |    |    |
| Premiums receivable oncredit swaps                                            |  |                      | 12      |    |  |   | (103    | )  |
| Accruedpremiums on creditswaps                                                |  |                      | 186     |    |  |   | (72     | )  |
| Deferred creditswappremiums                                                   |  |                      | (6      | )  |  |   | (11     | )  |
| Deferredfinancial guaranteepremiums                                           |  |                      | (98     | )  |  |   | (99     | )  |
| Brokeragefees payable                                                         |  |                      | 5       |    |  |   | 32      |    |
| Accruedinterestreceivable                                                     |  |                      | (747    | )  |  |   | (482    | )  |
| Premiumsreceivable on financialguarantees                                     |  |                      | 100     |    |  |   | 201     |    |
| Prepaidexpenses                                                               |  |                      | 153     |    |  |   | 8       |    |
| Assetmanagement feereceivable                                                 |  |                      | (16     | )  |  |   | — |    |
| Accountspayable                                                               |  |                      | 784     |    |  |   | (261    | )  |
| Compensationpayable                                                           |  |                      | (3,862  | )  |  |   | (4,057  | )  |
| Interestpayable                                                               |  |                      | (11     | )  |  |   | — |    |
| Currentstate and local taxespayable.                                          |  |                      | 35      |    |  |   | 72      |    |
| Netcash provided by operatingactivities                                       |  |                      | 4,368   |    |  |   | 2,938   |    |
| **Cashflows from investingactivities**                                        |  |                      |    |    |  |   |    |    |
| Fixed assetpurchases.                                                         |  |                      | (10     | )  |  |   | (8      | )  |
| Net sale(purchase) of short-terminvestments.                                  |  |                      | 27,496  |    |  |   | (19,656 | )  |
| Otherassetpurchases                                                           |  |                      | (166    | )  |  |   | (151    | )  |
| Netcash provided by (used in) investingactivities                             |  |                      | 27,320  |    |  |   | (19,815 | )  |
| **Cashflows from financingactivities**                                        |  |                      |    |    |  |   |    |    |
| Retirement ofcommonshares                                                     |  |                      | (2,397  | )  |  |   | — |    |
| Proceeds fromissuance of commonshares                                         |  |                      | 27      |    |  |   | — |    |
| Debt issuancecosts                                                            |  |                      | (31     | )  |  |   | — |    |
| Net preferreddistributions ofsubsidiary                                       |  |                      | (649    | )  |  |   | (542    | )  |
| Netcash used in financingactivities                                           |  |                      | (3,050  | )  |  |   | (542    | )  |
| Netincrease (decrease) incash                                                 |  |                      | 28,638  |    |  |   | (17,419 | )  |
| Cash and cashequivalents at beginning ofperiod                                |  |                      | 320,989 |    |  |   | 257,967 |    |
| Cashand cash equivalents at end ofperiod                                      |  | $                         | 349,627 |    |  | $      | 240,548 |    |
| **Supplementaldisclosures**                                                   |  |                      |    |    |  |   |    |    |
| Cash paid forinterest                                                         |  | $                         | 493     |    |  | $      | — |    |
| Cash paid fortaxes                                                            |  | $                         | — |    |  | $      | — |    |
|                                                                               |

Seeaccompanying notes.

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1.    Organizationand Basis of Presentation

Primus Guaranty, Ltd.("Primus Guaranty" or the"Company"), is a Bermuda holding company andthe 100% owner of Primus (Bermuda), Ltd. ("PrimusBermuda"), also a Bermuda holding company. The Companyconsiders its legal domicile to be where it is incorporated, Bermuda.Primus Bermuda is the 100% owner of Primus Group Holdings, LLC("Primus Group Holdings"), a Delaware limitedliability company. Primus Group Holdings has two principal operatingsubsidiaries: Primus Financial Products, LLC ("PrimusFinancial"), and Primus Asset Management, Inc.("Primus Asset Management"). Primus Financialis a Delaware limited liability company that maintains a long-termcounterparty credit rating of AAA from Standard & Poor'sRating Services ("S&P") and Aaa fromMoody's Investors Service, Inc.("Moody's" and, together with S&P,the "Rating Agencies"). Primus Financial isprimarily a provider of credit risk protection in the form of creditswaps, covering single name, investment grade corporate and sovereignfinancial obligations. Primus Financial is also permitted to sellcredit swaps referencing portfolios containing obligations of multiplereference entities. Primus Asset Management is a provider ofadministrative and technology support to Primus Financial and an assetmanager for Primus Financial and third parties.

Primus Financialand Primus Asset Management function as separate entities from PrimusGroup Holdings. Additionally, the obligations of Primus Financial arenot the obligations of Primus Bermuda, Primus Group Holdings, or anyother of its affiliates, and vice versa. Primus Asset Management whollyowns Primus Re, Ltd. ("Primus Re"), a Bermudacompany that operates as a financial guarantee insurance company and islicensed as a Class 3 Insurer under the Insurance Act of 1978 ofBermuda.

The accompanying unaudited consolidated financialstatements of Primus Guaranty, Ltd. have been prepared in accordancewith U.S. generally accepted accounting principles for interimfinancial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, they do not include all ofthe information and footnotes required by generally accepted accountingprinciples for complete financial statements. In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included.Operating results for the periods presented are not necessarilyindicative of the results that may be expected for any other interimperiod or for the year ended December 31, 2005. The consolidatedfinancial statements include the accounts of the Company and its whollyowned subsidiaries. All significant intercompany balances have beeneliminated.

The consolidated financial statements represent asingle reportable segment, as defined in Statement of FinancialAccounting Standards ("SFAS") No. 131,Disclosures about Segments of an Enterprise and RelatedInformation.

The consolidated financial statements arepresented in U.S. dollar equivalents. At March 31, 2005 and December31, 2004, Primus Financial's credit swap activities wereconducted in U.S. dollars and Euros.

Certain 2004 amounts havebeen reclassified to be consistent with the 2005 presentation.

2.    Summary of Significant Accounting Policies

Creditswaps

Credit swaps are over-the-counter("OTC") derivative financial instruments andare recorded at fair value in accordance with SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities.Obtaining the fair value (as such term is defined in SFAS No. 133) forsuch instruments requires the use of management judgment. Theseinstruments are valued using pricing models based on the net presentvalue of expected future cash flows and observed prices for other OTCtransactions bearing similar risk characteristics. The fair value ofthese instruments appears on the consolidated statement of financialcondition as unrealized gains or losses on credit swaps. The Companydoes not believe that its credit swaps fall outside the scope of theguidance of SFAS No. 133 paragraph 10d, as amended by SFAS No. 149,Amendment of Statement 133 on Derivative Instruments and HedgingActivities, because there is no contractual requirement that theprotection purchaser be exposed to the underlying risk.

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Net credit swap revenue includes realizedand unrealized gains and losses on credit swaps and net premiumsearned.

Premiums are taken into income as they are earned over aspecified time period. Accrued Premiums on credit swaps representpremiums earned but not yet payable by Primus Financial'scounterparty. Premiums Receivable on credit swaps represents premiumsthat are both earned by and payable to Primus Financial.

Financial Guarantee-Insurance Contracts

The Company hasundertaken a limited amount of financial guarantee business through itssubsidiary, Primus  Re. Financial guarantees are insurancecontracts that contingently require the guarantor to make payments tothe guaranteed party. The Company designs its guarantee contracts toqualify as non-derivatives in accordance with the scope exception underparagraph 10d of SFAS 133 as amended by SFAS No. 149, Amendment ofStatement 133 on Derivative Instruments and Hedging Activities.This scope exception requires that the guaranteed party be exposed toloss both at inception and over the life of the contract, incurrence ofloss must be a precondition for payment under the contract, and theselosses are based on payments to be made solely to reimburse theguaranteed party for failure of the debtor to satisfy its requiredpayment obligations under a nonderivative contract, either atpre-specified payment dates or accelerated payment dates as a result ofthe occurrence of an event of default (as defined in the financialobligation covered by the guarantee contract) or notice of accelerationbeing made to the debtor by the creditor. Thus, the Company accountsfor its financial guarantee contracts in accordance with SFAS No. 60,Accounting and Reporting by Insurance Enterprises. This requiresthat premiums are deferred and recognized over the life of the contractand that losses are recorded in the period that they occur based on anestimate of the ultimate cost of losses incurred.

The Companydoes not actively offer financial guarantee insurance. Rather, it is analternative the Company has available when a counterparty requests aninsurance contract instead of a credit swap. Generally, acounterparty's choice of a financial guarantee insurance contractversus a credit swap is determined by economic terms available in themarketplace as well as regulatory and accounting considerations. Also,the purchaser of an insurance contract cannot submit a claim forpayment unless it has an insurable loss, whereas the purchaser of acredit swap need not have actual exposure to the underlying risk.

Insurance Premiums Earned and Receivable and Related Expenses

In exchange for providing financial guarantee protection tocounterparties, Primus Re receives premiums over the life of thecontract. The amount expected over the life of the policy is reflectedin the statement of financial condition and will be reduced as paymentsare received quarterly in advance.

Although Primus Re providesinsurance and purchases off-setting credit swaps through"separate accounts" under a private act,those accounts of Primus Re are not deemed to be separate accountsunder SOP 03-01, Accounting & Reporting by Insurance Enterprisesfor Certain Nontraditional Long-Duration Contracts for SeparateAccounts, since investment performance is not passed through to thecontract holder.

Policy acquisition costs include only thoseexpenses that relate primarily to, and vary with, premium production.Such costs generally include compensation of employees involved inunderwriting and policy issuance functions, certain rating agency fees,state premium taxes and certain other underwriting expenses. No costshave been deferred by the Company as of March 31, 2005, as any suchamounts have been immaterial.

Deferred Financial GuaranteePremiums

Unearned premiums related to the financial guaranteeprotection provided are used to establish the liability at inception.This liability is reflected in income on a straight-line basis over theperiod the risk protection is provided.

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Unpaid Losses and Loss Expenses onFinancial Guarantees

Liabilities for unpaid losses and lossexpenses include the accumulation of individual case estimates forclaims reported as well as estimates of incurred but not reportedclaims and estimates of loss settlement expenses on the obligations ithas insured. Estimates will be based upon historical industry lossexperience modified for current trends as well as prevailing economic,legal and social conditions. Any changes in estimates are reflected inoperating results in the period in which the estimates changed. AtMarch 31, 2005 and at December 31, 2004, the Company had no lossreserves recorded.

Income Taxes

Income tax expense iscomputed in accordance with the requirements of SFAS No. 109,Accounting for Income Taxes, which prescribes the asset andliability approach to accounting for income taxes. The asset andliability approach requires the recognition of deferred tax liabilitiesand assets for the expected future tax consequences of temporarydifferences between the carrying amounts and the tax bases of assetsand liabilities.

Employee Compensation Plans

In 2003,the Company adopted the fair value approach on a prospective basis forrecording stock-based employee compensation in accordance with the fairvalue method prescribed by SFAS No.  123, Accounting forStock-based Compensation, as amended by SFAS No. 148, Accountingfor Stock Based Compensation—Transition and Disclosure.Compensation expense is recognized based on the fair value of stockoptions, performance shares, restricted shares and restricted shareunits ("RSU") granted over the relatedvesting period. The fair value of the stock options granted isdetermined through the use of an option-pricing model.

RecentlyIssued Accounting Standards

In December 2004, the FASB issuedSFAS 123R, which replaces SFAS 123 and supersedes APB  25. SFAS123R eliminates the choice of alternative accounting methods, andrequires that all entities follow the fair value based method of SFAS123. Public entities will be required to apply Statement 123R as of thefirst annual reporting period that begins after June 15, 2005. Theadoption of SFAS 123R is not expected to have a significant impact onthe Company's financial statements.

3.    InitialPublic Offering

Primus Guaranty completed an Initial PublicOffering ("IPO"), on October 5, 2004, listingits shares on the New York Stock Exchange("NYSE"). The Company issued 9,143,493 sharesat a price of $13.50. The proceeds to the Company were $110.7 million,net of the underwriting discount and offering expenses. Primus Guarantyhas subsequently contributed $60.0 million of the IPO proceeds toPrimus Financial to support the growth of its credit swap business.Primus Guaranty has invested the remaining net proceeds in short-termmoney market instruments, pending utilization in Primus Financialand/or other businesses related to the credit markets.

4.    Cash and Cash Equivalents

The Company and itssubsidiaries invest only in obligations of the United States of Americaor direct debt obligations of U.S. Agencies (includinggovernment-sponsored enterprises) rated AAA and Aaa by the respectiveRating Agencies, and commercial paper rated A-1 and P-1 by therespective Rating Agencies.

As of March 31, 2005 and 2004, theCompany's cash and cash equivalents include U.S. governmentagency obligations and money market funds. All outstanding obligationsin this category mature within 90 days.

5.    Short-TermInvestments

Short-term investments included obligations of theUnited States of America or direct debt obligations of U.S. Agencies(including government-sponsored enterprises) rated AAA and Aaa by therespective Rating Agencies, which have original maturities ormaturities at time of purchase between 91 days and two years.

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As of March 31, 2005 and 2004, theCompany's short-term investments consisted entirely of short-termU.S. government agency obligations, which mature within two years.

6.    Credit Swap Revenues and Portfolio

Net credit swaprevenue, as presented in the consolidated statement of operations,comprises changes in the fair value of credit swaps, realized gains orlosses on the termination of credit swaps and premium income orexpense. The realized gains and losses on credit swaps representrealized gains and losses on unwound or assigned credit swaps. Therealization of gains or losses on credit swaps will generally result ina reduction in unrealized gains or losses and accrued premium at thepoint in time realization occurs.

In exchange for providingcredit protection to its counterparties, Primus Financial receivespremium payments as a series of fixed cash flows. Premiums are takeninto income as they are earned over a specified time period. Accruedpremiums on credit swaps represent premiums earned but not yet payableby Primus Financial's counterparty. Premiums receivable on creditswaps represents premiums that are both earned by and payable to PrimusFinancial. When Primus Financial purchases credit protection from itscounterparties, Primus Financial pays premiums as a series of fixedcash flows. The premium expense is recognized ratably over the life ofthe transaction as a component of net credit swap revenue.

Inaccordance with accounting principles generally accepted in the UnitedStates, the Company carries its credit swaps on its balance sheet attheir fair value. Changes in the fair value of the Company'scredit swap portfolio are recorded as unrealized gains or losses in theCompany's consolidated income statement. If a credit swap has anincrease in fair value during a period, the increase will add to theCompany's net credit swap revenues for that period. Conversely,if a credit swap has a decline in fair value during the period, thedecline will subtract from the Company's net credit swap revenuesfor that period. Changes in the fair value of the Company'scredit swap portfolio are a function of the notional amount andcomposition of the portfolio and prevailing market credit swap premiumsfor comparable credit swaps. The Company generally holds the creditswaps it sells to maturity, at which point, assuming no credit eventhas occurred, the cumulative unrealized gains and losses on each creditswap would equal zero. In general, the Company aggregates fair valuesof individual credit swaps by counterparty for presentation on theCompany's statement of condition. If the aggregate total of fairvalues for a counterparty is a net gain, the total is recorded as acomponent of unrealized gains on credit swaps, at fair value in thestatement of financial condition. If the aggregate total of fair valuesfor a counterparty is a net loss, the total is recorded as a componentof unrealized losses on credit swaps, at fair value in the statement offinancial condition. Aggregation by counterparty is applied where avalid ISDA master agreement is in place with the counterparty. Ininstances where the Company does not yet have a valid ISDA masteragreement with the counterparty, the fair values of individual swaptransactions are recorded as components of unrealized gains or losseson credit swaps, at fair value, dependent upon whether the individualcontract was at a gain or a loss.

As a general rule, when theCompany sells credit protection, it intends to maintain the transactionuntil maturity. However, there are two sets of circumstances in whichthe Company could elect to terminate transactions prior to maturity,and the Company monitors its portfolio on a continuing basis to assesswhether those circumstances are present.

First, whenever theCompany receives new information suggesting that the credit quality ofthe underlying risk has deteriorated to a material degree, the Companyconsiders the possibility of terminating the transaction, usually at aloss, to avoid the larger loss that could result if the credit swapwere to remain in place until a credit event occurs. The principalfactor that governs the Company's decision regarding terminationin these circumstances is whether the Company believes that theunderlying risk has become substantially greater than the level of riskthe Company would choose to assume in entering into a new sale ofcredit default protection.

Second, the Company may also elect toterminate a transaction for which it has an unrealized gain based onone or more of the following considerations: the likelihood of furthergains arising from 

9

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the position, its view as to whether thecapital dedicated to the position would be profitably reallocated, itstotal exposure to a particular Reference Entity, the total size of itsportfolio in relation to its capital and the total size of its swappositions and exposures with a particular counterparty which might bereduced so that the counterparty may enter into additional swaps withthe Company.

The Company terminates (or offsets) a credit swapin any one of three ways. The Company may negotiate an agreedtermination through the original counterparty (an unwind). The Companymay negotiate an assignment and novation of its rights and obligationsunder the credit swap to a third party (an assignment). As analternative to terminating a transaction, the Company may enter into anequal and opposite transaction with a third party under which theCompany purchases credit default protection on terms that match theterms of the original transaction (an offset). In this last case, bothsides of the position may subsequently be unwound or assigned.

In the event of an unwind or assignment, the Company pays orreceives a cash settlement negotiated with the counterparty orassignee, based on the fair value of the credit swap contract and theaccrued premium on the swap contract at the time of negotiation. Theamounts the Company pays or receives are recorded as a realization offair value and as a realization of accrued premiums in the period inwhich the termination occurs.

The tables below present thecomponents of credit swap revenues for the three months ended March 31,2005 and 2004. The Company distinguishes among credit swaps sold,credit swaps purchased as short-term investments and credit swapspurchased to offset the credit risk on credit swaps previouslysold.

Net credit swap revenues for the three months ended March31, 2005 (inthousands)

|                                                                  |  |                        |        |               |  |                  |         |                                  |  |        |         |         |  |        |         |         |  |        |         |         |  |  |
|------------------------------------------------------------------|--|------------------------|--------|---------------|--|------------------|---------|----------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                             |  | Premiumincome(expense) |        | Realizedgains |  | Realized(losses) |         | Changeinunrealizedgains/(losses) |  | Totals |
| Creditswapssold                                                  |  | $                      | 11,628 |          |  | $                | 119     |                             |  | $      | — |    |  | $      | (19,963 | )  |  | $      | (8,216  | )  |
| Creditswaps purchased as short-terminvestments                   |  |                   | (403   | )        |  |             | 21      |                             |  |   | (7      | )  |  |   | 407     |    |  |   | 18      |    |
| Creditswaps purchased to offset credit risk on certain swapssold |  |                   | (23    | )        |  |             | — |                             |  |   | — |    |  |   | 23      |    |  |   | — |    |
| Totals                                                           |  | $                      | 11,202 |          |  | $                | 140     |                             |  | $      | (7      | )  |  | $      | (19,533 | )  |  | $      | (8,198  | )  |
|                                                                  |

Netcredit swap revenues for the three months ended March 31, 2004 (inthousands)

|                                                                  |  |                        |        |               |  |                  |         |                                  |  |        |         |         |  |        |         |         |  |        |        |         |  |  |
|------------------------------------------------------------------|--|------------------------|--------|---------------|--|------------------|---------|----------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|--------|---------|--|--|
|                                                             |  | Premiumincome(expense) |        | Realizedgains |  | Realized(losses) |         | Changeinunrealizedgains/(losses) |  | Totals |
| Creditswapssold                                                  |  | $                      | 10,010 |          |  | $                | 1,173   |                             |  | $      | (12     | )  |  | $      | (14,967 | )  |  | $      | (3,796 | )  |
| Creditswaps purchased as short-terminvestments                   |  |                   | (122   | )        |  |             | 436     |                             |  |   | (15     | )  |  |   | 450     |    |  |   | 749    |    |
| Creditswaps purchased to offset credit risk on certain swapssold |  |                   | (23    | )        |  |             | — |                             |  |   | — |    |  |   | 40      |    |  |   | 17     |    |
| Totals                                                           |  | $                      | 9,865  |          |  | $                | 1,609   |                             |  | $      | (27     | )  |  | $      | (14,477 | )  |  | $      | (3,030 | )  |
|                                                                  |

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The notional amount, fair value andaverage fair value of open credit swap transactions entered into withthird parties at March 31, 2005 and December 31, 2004 are as follows(in thousands): 

|                           |  |              |            |                 |  |        |            |        |  |  |
|---------------------------|--|--------------|------------|-----------------|--|--------|------------|--------|--|--|
|                      |  | March31,2005 |            | December31,2004 |
| **Credit SwapsSold**      |  |
| Gross notionalamount      |  | $            | 10,830,649 |            |  | $      | 10,544,728 |   |
| Fairvalue:                |  |
| Asset                     |  |         | 32,736     |            |  |   | 48,619     |   |
| Liability                 |  |         | 4,215      |            |  |   | 159        |   |
| Averagefairvalue:         |  |
| Asset                     |  |         | 43,902     |            |  |   | 34,131     |   |
| Liability                 |  |         | 1,450      |            |  |   | 432        |   |
| **CreditSwaps Purchased** |  |
| Gross notionalamount      |  | $            | 484,460    |            |  | $      | 468,175    |   |
| Fairvalue                 |  |
| Asset                     |  |         | 22         |            |  |   | 0          |   |
| Liability                 |  |         | 1,818      |            |  |   | 2,202      |   |
| Averagefairvalue          |  |
| Asset                     |  |         | 8          |            |  |   | 185        |   |
| Liability                 |  |         | 2,095      |            |  |   | 648        |   |
|                           |

"Asset"in the above table represents unrealized gains on credit swaps while"Liability" represents unrealized losses oncredit swaps. All credit swaps that have been contractually establishedwith each counterparty under an ISDA master agreement are subject tonetting arrangements. The notional amounts of the credit swap contractsin the preceding table are presented on a gross basis and the fairvalues of such contracts are presented net by counterparty, where amaster agreement is in place. The average fair value in the above tablewas calculated on a daily basis.

Under the terms of PrimusFinancial's operating guidelines, derivatives transactions canonly include credit swaps. Credit swaps are derivative transactionsthat obligate one party to the transaction (the"Seller") to pay an amount to the other partyto the transaction (the "Buyer") should oneof a specified group of events ("CreditEvents") be incurred by an unrelated third party (the"Reference Entity") specified in thecontract. The amount to be paid by the Seller will either be (a)the notional amount of the transaction, in exchange for which theSeller must be delivered a defined obligation of the Reference Entity(called physical settlement), or (b) the difference between the currentmarket value of a defined obligation of the Reference Entity and thenotional amount of the transaction (called cash settlement). Inexchange for incurring the potential of a Credit Event-generated loss,the Seller will receive a fixed premium for the term of the contract(or until the occurrence of a Credit Event). The fixed premium isgenerally paid quarterly in arrears over the term of thetransaction.

Nearly all transactions entered into between theBuyer and the Seller are subject to an ISDA master agreement executedby both parties. The master agreement allows for the consolidation ofthe market exposures and termination of all transactions between theBuyer and Seller in the event a Default (as defined by the masteragreement) is incurred by either party.

Primus Financial isprimarily a Seller of credit swaps, although it may also buy creditswaps. Credit swaps purchased to off-set risks do not qualify as hedgesin accordance with SFAS No. 133. In addition, Primus Financial ispermitted to purchase credit swaps in order to seek short-term marketappreciation as a limited percentage of its overall portfolio(represented as Credit Swaps Purchased in the below tables). Thecompany's operating guidelines and board authorization limit thenotional amount of credit swaps purchased for this purpose to seven anda half percent of the notional amount of credit swaps sold.

Theprimary risks inherent in the Company's activities are (a) thatReference Entities specified in its credit swap transactions will incurCredit Events (Credit Events may include any or all of the

11

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following: bankruptcy, failure to pay,repudiation or moratorium, and modified or original restructuring) thatwill require Primus Financial to make payments to the Buyers of thetransactions, (b) where Primus Financial is a Buyer of a credit swapand a Credit Event occurs, the Seller fails to make payment to theCompany, and (c) that Buyers of the transactions from Primus Financialwill default on their required premium payments at times when the fairvalue of the underlying transactions are positive to Primus Financial.Since inception, none of these events had occurred.

The tablesbelow summarize the notional amounts and fair value at risk toperformance by Reference Entities and Counterparties of credit swaptransactions, which are recorded at fair value (summarized by creditrating) as of March 31, 2005 and December 31, 2004. Fair Value is thefair value of all transactions after consideration of offsettingexposures under Master Agreements with counterparties.

Riskoff-set transactions are included in the below tables as part of CreditSwaps Purchased. The total notional amounts of risk off-settransactions were $5.0 million and $5.0 million at March 31, 2005 andDecember 31, 2004, respectively. Fair value of the risk offsettransactions equaled $(183) thousand and $(206) thousand at March 31,2005 and December 31, 2004, respectively.

 (in thousandsand U.S. dollarequivalent)

|                        |  |                |            |                 |  |                |        |           |  |        |            |        |  |        |        |         |  |  |
|------------------------|--|----------------|------------|-----------------|--|----------------|--------|-----------|--|--------|------------|--------|--|--------|--------|---------|--|--|
|                   |  | March31,2005   |            | December31,2004 |
| Moody'sRatingCategory  |  | NotionalAmount |            | FairValue       |  | NotionalAmount |        | FairValue |
| **ReferenceEntity**    |  |
| Credit SwapsSold:      |  |
| Aaa                    |  | $              | 599,820    |            |  | $              | 758    |      |  | $      | 651,270    |   |  | $      | 866    |    |
| Aa                     |  |           | 1,936,420  |            |  |           | 4,264  |      |  |   | 1,917,131  |   |  |   | 5,609  |    |
| A                      |  |           | 4,379,774  |            |  |           | 17,544 |      |  |   | 4,310,452  |   |  |   | 22,511 |    |
| Baa                    |  |           | 3,904,635  |            |  |           | 6,097  |      |  |   | 3,642,330  |   |  |   | 19,295 |    |
| Ba                     |  |           | 10,000     |            |  |           | (143   | )    |  |   | 23,545     |   |  |   | 179    |    |
| Total                  |  | $              | 10,830,649 |            |  | $              | 28,520 |      |  | $      | 10,544,728 |   |  | $      | 48,460 |    |
| CreditSwapsPurchased:  |  |
| Aaa                    |  | $              | 45,928     |            |  | $              | (147   | )    |  | $      | 47,090     |   |  | $      | (158   | )  |
| Aa                     |  |           | 12,964     |            |  |           | (4     | )    |  |   | 13,545     |   |  |   | (44    | )  |
| A                      |  |           | 210,748    |            |  |           | (552   | )    |  |   | 209,815    |   |  |   | (803   | )  |
| Baa                    |  |           | 165,928    |            |  |           | (823   | )    |  |   | 160,635    |   |  |   | (969   | )  |
| NR                     |  |           | 48,892     |            |  |           | (269   | )    |  |   | 37,090     |   |  |   | (228   | )  |
| Total                  |  | $              | 484,460    |            |  | $              | (1,795 | )    |  | $      | 468,175    |   |  | $      | (2,202 | )  |
| **CounterpartyBuyer**  |  |
| Credit SwapsSold:      |  |
| Aaa                    |  | $              | 5,000      |            |  | $              | 44     |      |  | $      | 5,000      |   |  | $      | 49     |    |
| Aa                     |  |           | 8,733,670  |            |  |           | 20,180 |      |  |   | 8,304,867  |   |  |   | 35,922 |    |
| A                      |  |           | 2,091,979  |            |  |           | 8,296  |      |  |   | 2,234,861  |   |  |   | 12,489 |    |
| Total                  |  | $              | 10,830,649 |            |  | $              | 28,520 |      |  | $      | 10,544,728 |   |  | $      | 48,460 |    |
| **CounterpartySeller** |  |
| Credit SwapsPurchased: |  |
| Aa                     |  | $              | 385,014    |            |  | $              | (1,389 | )    |  | $      | 387,858    |   |  | $      | (1,699 | )  |
| A                      |  |           | 99,446     |            |  |           | (406   | )    |  |   | 80,317     |   |  |   | (503   | )  |
| Total                  |  | $              | 484,460    |            |  | $              | (1,795 | )    |  | $      | 468,175    |   |  | $      | (2,202 | )  |
|                        |

12

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|                        |  |                |            |                 |  |                |        |           |  |        |            |        |  |        |        |         |  |  |
|------------------------|--|----------------|------------|-----------------|--|----------------|--------|-----------|--|--------|------------|--------|--|--------|--------|---------|--|--|
|                   |  | March31,2005   |            | December31,2004 |
| S&P RatingCategory |  | NotionalAmount |            | FairValue       |  | NotionalAmount |        | FairValue |
| **ReferenceEntity**    |  |
| Credit SwapsSold:      |  |
| AAA                    |  | $              | 589,820    |            |  | $              | 718    |      |  | $      | 627,725    |   |  | $      | 822    |    |
| AA                     |  |           | 1,870,129  |            |  |           | 3,494  |      |  |   | 1,826,628  |   |  |   | 4,462  |    |
| A                      |  |           | 4,951,395  |            |  |           | 20,803 |      |  |   | 4,863,204  |   |  |   | 25,569 |    |
| BBB                    |  |           | 3,409,305  |            |  |           | 3,648  |      |  |   | 3,217,171  |   |  |   | 17,536 |    |
| BB                     |  |           | 10,000     |            |  |           | (143   | )    |  |   | 10,000     |   |  |   | 71     |    |
| Total                  |  | $              | 10,830,649 |            |  | $              | 28,520 |      |  | $      | 10,544,728 |   |  | $      | 48,460 |    |
| CreditSwapsPurchased:  |  |
| AAA                    |  | $              | 55,928     |            |  | $              | (104   | )    |  | $      | 57,090     |   |  | $      | (198   | )  |
| AA                     |  |           | 25,928     |            |  |           | (57    | )    |  |   | 27,090     |   |  |   | (109   | )  |
| A                      |  |           | 234,266    |            |  |           | (800   | )    |  |   | 216,270    |   |  |   | (940   | )  |
| BBB                    |  |           | 168,338    |            |  |           | (834   | )    |  |   | 167,725    |   |  |   | (955   | )  |
| Total                  |  | $              | 484,460    |            |  | $              | (1,795 | )    |  | $      | 468,175    |   |  | $      | (2,202 | )  |
| **CounterpartyBuyer**  |  |
| Credit SwapsSold:      |  |
| AAA                    |  | $              | 30,928     |            |  | $              | (57    | )    |  | $      | 5,000      |   |  | $      | 49     |    |
| AA                     |  |           | 6,884,398  |            |  |           | 18,090 |      |  |   | 6,643,559  |   |  |   | 27,941 |    |
| A                      |  |           | 3,915,323  |            |  |           | 10,847 |      |  |   | 3,896,169  |   |  |   | 20,470 |    |
| Total                  |  | $              | 10,830,649 |            |  | $              | 28,520 |      |  | $      | 10,544,728 |   |  | $      | 48,460 |    |
| **CounterpartySeller** |  |
| Credit SwapsPurchased: |  |
| AA                     |  | $              | 289,086    |            |  | $              | (1,291 | )    |  | $      | 290,768    |   |  | $      | (1,433 | )  |
| A                      |  |           | 195,374    |            |  |           | (504   | )    |  |   | 177,407    |   |  |   | (769   | )  |
| Total                  |  | $              | 484,460    |            |  | $              | (1,795 | )    |  | $      | 468,175    |   |  | $      | (2,202 | )  |
|                        |

PrimusFinancial's operating guidelines impose various limits on thegeographical concentration of its business based on the country ofdomicile of each Reference Entity. Additionally, PrimusFinancial's counterparties are global financial institutions, andnearly all have entered into Master Agreements with Primus Financialthat consolidate the counterparty risk to one office of thatcounterparty. For the three months ended March 31, 2005, twocounterparties each generated greater than ten percent of theCompany's total premium revenue, and for the quarter ended March31, 2004, three counterparties each generated greater than ten percentof the Company's total premium revenue.

13

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The table below shows the geographicaldistribution of Primus Guaranty's credit swap portfolio bydomicile of the Reference Entity and domicile of the counterparty (inthousands and U.S. dollar equivalent):

|                           |  |                |            |                 |  |                |        |            |  |        |            |        |  |        |        |         |  |  |
|---------------------------|--|----------------|------------|-----------------|--|----------------|--------|------------|--|--------|------------|--------|--|--------|--------|---------|--|--|
|                      |  | March31,2005   |            | December31,2004 |
| Country ofDomicile        |  | NotionalAmount |            | Fair Value      |  | NotionalAmount |        | Fair Value |
| **CreditSwaps Sold**      |  |
| By ReferenceEntity:       |  |
| U.S.                      |  | $              | 5,597,910  |            |  | $              | 14,006 |       |  | $      | 5,262,363  |   |  | $      | 26,899 |    |
| OtherG-7countries         |  |           | 3,467,398  |            |  |           | 11,758 |       |  |   | 3,478,284  |   |  |   | 14,962 |    |
| OtherEurope               |  |           | 1,436,341  |            |  |           | 1,936  |       |  |   | 1,525,081  |   |  |   | 5,301  |    |
| Bermuda                   |  |           | 104,000    |            |  |           | 89     |       |  |   | 74,000     |   |  |   | 380    |    |
| Others                    |  |           | 225,000    |            |  |           | 731    |       |  |   | 205,000    |   |  |   | 918    |    |
| Total                     |  | $              | 10,830,649 |            |  | $              | 28,520 |       |  | $      | 10,544,728 |   |  | $      | 48,460 |    |
| ByCounterparty:           |  |
| U.S.                      |  | $              | 5,471,481  |            |  | $              | 14,758 |       |  | $      | 5,243,169  |   |  | $      | 22,797 |    |
| OtherG-7countries         |  |           | 3,024,922  |            |  |           | 10,037 |       |  |   | 3,049,740  |   |  |   | 15,146 |    |
| OtherEurope               |  |           | 2,277,246  |            |  |           | 3,603  |       |  |   | 2,189,819  |   |  |   | 10,313 |    |
| Others                    |  |           | 57,000     |            |  |           | 122    |       |  |   | 62,000     |   |  |   | 204    |    |
| Total                     |  | $              | 10,830,649 |            |  | $              | 28,520 |       |  | $      | 10,544,728 |   |  | $      | 48,460 |    |
| **CreditSwaps Purchased** |  |
| By ReferenceEntity:       |  |
| U.S.                      |  | $              | 290,000    |            |  | $              | (1,068 | )     |  | $      | 265,000    |   |  | $      | (1,282 | )  |
| OtherG-7countries         |  |           | 155,568    |            |  |           | (640   | )     |  |   | 162,540    |   |  |   | (828   | )  |
| OtherEurope               |  |           | 38,892     |            |  |           | (87    | )     |  |   | 40,635     |   |  |   | (92    | )  |
| Total                     |  | $              | 484,460    |            |  | $              | (1,795 | )     |  | $      | 468,175    |   |  | $      | (2,202 | )  |
| ByCounterparty:           |  |
| U.S.                      |  | $              | 233,892    |            |  | $              | (819   | )     |  | $      | 215,635    |   |  | $      | (935   | )  |
| OtherG-7countries         |  |           | 174,640    |            |  |           | (664   | )     |  |   | 185,450    |   |  |   | (879   | )  |
| OtherEurope               |  |           | 55,928     |            |  |           | (203   | )     |  |   | 47,090     |   |  |   | (231   | )  |
| Others                    |  |           | 20,000     |            |  |           | (109   | )     |  |   | 20,000     |   |  |   | (157   | )  |
| Total                     |  | $              | 484,460    |            |  | $              | (1,795 | )     |  | $      | 468,175    |   |  | $      | (2,202 | )  |
|                           |

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The table below shows the distribution ofPrimus Guaranty's credit swap portfolio by year of maturity as ofMarch 31, 2005 and December 31, 2004 (in thousands and U.S. dollarequivalent):

|                           |  |                |            |                        |  |                |        |                        |  |        |            |        |  |        |         |         |  |  |
|---------------------------|--|----------------|------------|------------------------|--|----------------|--------|------------------------|--|--------|------------|--------|--|--------|---------|---------|--|--|
|                      |  | March31,2005   |            | December31,2004        |
|                      |  | NotionalAmount |            | FairValueofTransaction |  | NotionalAmount |        | FairValueofTransaction |
| **CreditSwaps Sold**      |  |
| Year ofMaturity           |  |
| 2005                      |  | $              | 2,243,192  |                   |  | $              | 2,115  |                   |  | $      | 2,841,441  |   |  | $      | 3,859   |    |
| 2006                      |  |           | 1,071,043  |                   |  |           | 718    |                   |  |   | 1,014,554  |   |  |   | 1,340   |    |
| 2007                      |  |           | 2,595,718  |                   |  |           | 17,611 |                   |  |   | 2,583,503  |   |  |   | 20,442  |    |
| 2008                      |  |           | 1,177,018  |                   |  |           | 9,909  |                   |  |   | 1,184,157  |   |  |   | 11,427  |    |
| 2009                      |  |           | 2,860,581  |                   |  |           | 1,711  |                   |  |   | 2,901,073  |   |  |   | 11,423  |    |
| 2010                      |  |           | 883,097    |                   |  |           | (3,544 | )                 |  |   | 20,000     |   |  |   | (31     | )  |
| Total                     |  | $              | 10,830,649 |                   |  | $              | 28,520 |                   |  | $      | 10,544,728 |   |  | $      | 48,460  |    |
| **CreditSwaps Purchased** |  |
| Year ofMaturity           |  |
| 2007                      |  | $              | 10,000     |                   |  | $              | (56    | )                 |  | $      | 10,000     |   |  | $      | (43     | )  |
| 2008                      |  |           | 15,000     |                   |  |           | 4      |                   |  |   | 15,000     |   |  |   | (21     | )  |
| 2009                      |  |           | 424,460    |                   |  |           | (1,721 | )                 |  |   | 443,175    |   |  |   | (2,138  | )  |
| 2010                      |  |           | 35,000     |                   |  |           | (22    | )                 |  |   | —    |   |  |   | — |    |
| Total                     |  | $              | 484,460    |                   |  | $              | 1,795  |                   |  | $      | 468,175    |   |  | $      | (2,202  | )  |
|                           |

7.    LongTerm Debt of Subsidiary

Primus Financial issued $75.0 millionof subordinated deferrable interest notes on July 23, 2004 that maturein July 2034. The notes are subordinated in right of payment to theprior payment in full of all existing and future senior indebtedness ofthe company, including counterparty claims. The rate on the notes isset through a monthly auction process, although the Company has theoption to fix the rate for longer periods of time. The notes areredeemable at the option of Primus Financial, in whole or in part, onany auction date, at a redemption price equal to 100% of theprincipal amount of the notes to be redeemed, plus any accrued andunpaid interest thereon to the redemption date. The interest rate onthe notes was fixed on the issue date at a rate of 2.57% (LIBORplus 20 basis points) for a period of one year. The Company incurredinterest expense of $482 thousand on these subordinated notes for thethree months ended March 31, 2005.

Costs associated with theissuance of this debt were $1.2 million and are shown net ofaccumulated amortization in the Company's consolidated statementof financial condition as debt issuance costs, and amortized over thelife of the debt. Amortization of debt issuance costs is included ininterest expense in the Company's consolidated statement ofoperations.

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8.    Earnings per Share

Basicearnings per share ("EPS") is calculated bydividing earnings available to common stockholders by the weightedaverage number of common shares outstanding. Diluted EPS is similar tobasic EPS, but adjusts for the effect of the potential issuance ofcommon shares. The following table presents the computations of basicand diluted EPS:

|                                         |  |                           |         |                 |  |        |         |                 |  |  |
|-----------------------------------------|--|---------------------------|---------|-----------------|--|--------|---------|-----------------|--|--|
|                                    |  | Threemonths endedMarch31, |
|                                    |  | 2005                      |         | 2004            |
| Netloss available to commonstockholders |  | $                         | (13,854 | )          |  | $      | (8,262  | )          |
| Weighted-averagebasic sharesoutstanding |  |                      | 43,213  |            |  |   | 2,570   |            |
| **Effectof dilutive instruments**       |  |
| Series A PreferredStock                 |  |                      | — |            |  |   | — |  (a)  |
| Employeestockoptions                    |  |                      | — |  (a)  |  |   | — |  (a)  |
| Restrictedshareunits                    |  |                      | — |  (a)  |  |   | — |  (a)  |
| Warrants                                |  |                      | — |  (a)  |  |   | — |  (a)  |
| Dilutivepotentialshares                 |  |                      | — |            |  |   | — |            |
| Dilutedshares                           |  |                      | 43,213  |            |  |   | 2,570   |            |
| BasicEPS                                |  | $                         | (0.32   | )          |  | $      | (3.21   | )          |
| DilutedEPS                              |  | $                         | (0.32   | )          |  | $      | (3.21   | )          |
|                                         |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (a) | Securities(including those issuable pursuant to contingent stock agreements) thatcould potentially dilute basic EPS were not included in the computationof diluted EPS because to do so would have been anti-dilutive for theperiods presented. In 2005, employee stock options totaling 100,216shares, restricted share units equal to 223,264 thousand shares andwarrants representing 851,801 shares of common stock were excluded. In2004, Series A Preferred Stock which converted to 29,583 thousandshares, employee stock options totaling 494,444 shares, restrictedshare units equaling 721,201 shares and warrants representing 2,445thousand shares of common stock were excluded. |

9.    Stock Based Compensation

During the first quarterof 2005, the company purchased and retired common shares in the amountof approximately $2.4 million. The company issued stock to employees inconnection with the vesting of stock compensation plans. A portion ofthe shares were repurchased from the employees in order to pay requiredwithholding taxes, and subsequently retired. In addition, during thefirst quarter of 2005, approximately four thousand options wereexercised.

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|              |                                                                                      |
|--------------|--------------------------------------------------------------------------------------|
| Item2.  | MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS |

Thefollowing is a discussion and analysis of our financial condition andresults of operations. This discussion should be read in conjunctionwith our consolidated financial statements and accompanying notes whichappear in the Company's Annual Report on Form 10-K. It containsforward-looking statements that involve risks and uncertainties. Ouractual results could differ materially from those anticipated in theseforward-looking statements as a result of various factors, includingthose discussed below and in the Company's Annual Report on Form10-K, particularly under the headings "RiskFactors" and "Cautionary Note RegardingForward-Looking Statements."

BusinessOverview

We, through our principal operating subsidiary, PrimusFinancial, are primarily engaged in selling credit protection againstinvestment grade credit obligations of corporate and sovereignentities. In exchange for a fixed quarterly premium, if a bankruptcy,failure to pay or restructuring occurs with respect to a ReferenceEntity upon which Primus Financial has sold credit protection, PrimusFinancial agrees to pay the notional amount of the credit swap contractto its Counterparty in exchange for delivery of a credit obligation ofthat Reference Entity. We seek to minimize the risk inherent in ourcredit swap portfolio by maintaining a high quality, highly diversifiedcredit swap portfolio across Reference Entities, industries andcountries.

Primus Financial has the highest counterparty creditratings offered by S&P (AAA) and Moody's (Aaa) and is managedby an experienced team of professionals who have expertise in creditanalysis, investing, risk management and market analysis.

PrimusAsset Management manages the credit swap portfolios of Primus Financialand third parties. For such services, Primus Asset Management receivesa management fee.

Primus Re operates as a financial guaranteeinsurance company, and generates revenue by charging a higher insurancepremium for protection sold than the premium it pays for the offsettingprotection it purchases.

Critical Accounting Policies

Valuation of Credit Swaps

From the inception of ourbusiness, we have applied Statement of Financial Accounting Standards,or SFAS, 133, "Accounting for Derivative Instruments andHedging Activities," which established accounting andreporting standards for derivative instruments. SFAS 133 requiresrecognition of all credit swaps on the balance sheet at fair value. Themarket credit swap premium levels used to determine fair valuegenerally take into account the expectation of such events.

Thefair value of the credit swaps depends on a number of factors,primarily the market level of credit swap premiums associated withindividual Reference Entities and interest rates. Credit swaps arevalued using market-standard pricing models which calculate the netpresent value of differences between future premiums on currentlyquoted market credit swaps and the contractual future credit swappremiums on contracts we have undertaken. Our pricing model has beeninternally developed but is benchmarked against a market-standardmodel. Generally, our model uses quoted market credit swap premium dataon individual Reference Entities that we purchase from an independentpricing service. This service takes pricing information from a numberof prominent dealers and brokers in the credit swap market across arange of standard maturities and restructuring terms, and createsaverage market credit swap premium quotes on specific ReferenceEntities.

We believe there are a variety of factors that mayinfluence market credit swap premium levels. The principal factor isthe market's view of the probability that a Reference Entity willdefault over the multi-year horizon typical for a credit swap contract.Those views in turn are influenced by the state of the economy, theoutlook for corporate financial health in general as well as theoutlook for 

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particular industries and companies.Additional factors include the magnitude of debt outstanding and debtpaying capacity within those same industries and companies. One factorspecific to the credit swap market is the capacity of credit swapmarket participants to sell credit swaps. If, for example, commercialbanks are actively buying protection to manage their regulatorycapital, this will tend, other factors being equal, to absorb thecapacity of protection sellers and cause an increase in market creditswap premiums. Conversely, creation of special purpose vehicles thatsell protection create additional protection seller capacity and,absent additional demand, can cause a decrease in market premiums.Absent rapid and steep changes, interest rates have, at most, a limitedeffect on market credit swap premium levels.

During January andFebruary of 2005, market premium levels on credit swaps were relativelyunchanged from levels as of December 31, 2004. However, in March 2005we observed significant increases in market premium levels,particularly in certain industry sectors. As premium levels increasedduring March 2005, we increased the pace of investing in our creditswap portfolio.

Financial Guarantees

We haveundertaken a limited amount of financial guarantee business through oursubsidiary, Primus Re. Financial guarantees are insurance contractsthat contingently require the guarantor to make payments to theguaranteed party. Primus Re designs its guarantee contracts to qualifyas non-derivatives in accordance with the scope exception underparagraph 10d of SFAS 133, as amended by SFAS No. 149,"Amendment of Statement 133 on Derivative Instruments andHedging Activities". We account for our financialguarantee contracts in accordance with SFAS No. 60,"Accounting and Reporting by InsuranceEnterprises". This requires that premiums are deferred andrecognized over the life of the contract and that losses are recordedin the period that they occur based on an estimate of the ultimate costof losses incurred. Policy acquisition costs include only thoseexpenses that relate primarily to, and vary with, premium production.No policy acquisition costs have been deferred by us as of March 31,2005, as any such amounts have been immaterial. As of March 31, 2005,only three contracts had been written.

We do not actively offerfinancial guarantee insurance. Rather, it is an alternative we haveavailable when a counterparty requests an insurance contract instead ofa credit swap. Generally, a counterparty's choice of a financialguarantee insurance contract versus a credit swap is determined byeconomic terms available in the marketplace as well as regulatory andaccounting considerations. Also, the purchaser of an insurance contractcannot submit a claim for payment unless it has an insurable loss,whereas the purchaser of a credit swap need not have actual exposure tothe underlying risk.

Stock-Based Employee CompensationPlans

Prior to 2003, we followed Accounting Principles Board,or APB, No. 25, "Accounting for Stock Issued toEmployees". In 2003, we adopted the fair value approach ona prospective basis for recording stock-based employee compensation inaccordance with the fair value method prescribed in SFAS 123,"Accounting for Stock-Based Compensation", asamended by SFAS 148, "Accounting for Stock-BasedCompensation—Transition and Disclosure". Under theserules, compensation expense is recognized based on the fair value ofstock options, performance shares, restricted shares and restrictedshare units at the time of an award, adjusted and amortized over therelated vesting period. The fair value of the stock options granted isdetermined through the use of a market-standard option-pricing model,which requires judgment as to appropriate volatility and interest ratefactors. Prior to our IPO on September 30, 2004, in the absence of apublic market for our common shares, management and the board ofdirectors estimated the market value of our common shares for alloptions, restricted share units and share issuances based on valuationopinions from independent valuation consultants. After the IPO, thefair value used is the market value of our common shares at the grantdate.

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Results of Operations

Overview

During January and February of 2005,market premium levels on credit swaps were relatively unchanged fromlevels as of December 31, 2004. However, in March 2005 we observedsignificant increases in market premium levels, particularly in certainreference entity industry sectors, such as automobiles and insurance.As a result of the upward movements in market premium levels, the fairvalue of our credit swaps sold declined; this decline was slightlyoffset by a reduction in unrealized losses on our portfolio of creditswaps purchased. In accordance with our business strategy, as premiumlevels increased during March 2005, we increased the pace of investmentin our credit swap portfolio to take advantage of a more favorableinvestment climate. In addition, during the quarter we completed oursecond third party asset management transaction. Market interest ratescontinued to increase during the first quarter, which enabled us toearn additional interest income. A portion of our credit swaps aredenominated in Euros and currently we hold the premiums received inEuro in short term Euro-denominated investments. The Euro declined invalue in the first quarter against the U.S. dollar, resulting in arevaluation loss. Our compensation expenses increased in part due toprovisions we made for the accelerated compensation expenses arisingfrom the departures of former employees.

Threemonths ended March 31, 2005 compared with three months ended March 31,2004

We had a net loss of $13.9 million and $8.3 million forthe three months ended March 31, 2005 and 2004, respectively. Thisincrease in net loss was primarily driven by the increase in unrealizedlosses in the value of our credit swap portfolio, coupled withincreased expenses as a result of our expanded operations.

Net credit swap revenue

Net credit swap revenue was$(8.2) million and $(3.0) million for the three months endedMarch  31, 2005 and 2004, respectively. Net credit swap revenueincludes:

|              |                     |
|--------------|---------------------|
| •  | Net premiumsearned; |

|              |                                                 |
|--------------|-------------------------------------------------|
| •  | Net realized gains (losses) oncredit swaps; and |

|              |                                               |
|--------------|-----------------------------------------------|
| •  | Net unrealized gains(losses) on credit swaps. |

The table below shows the componentparts of net credit swap revenue for the three months ended March 31,2005 and2004:

|                                             |  |                            |         |         |  |        |         |         |  |  |
|---------------------------------------------|--|----------------------------|---------|---------|--|--------|---------|---------|--|--|
| ($in thousands)                             |  | Three monthsended March31, |
|                                        |  | 2005                       |         | 2004    |
| Netpremiums earned                          |  | $                          | 11,202  |    |  | $      | 9,865   |    |
| Netrealized gains on creditswaps            |  |                       | 133     |    |  |   | 1,582   |    |
| Net unrealized gains(losses) on creditswaps |  |                       | (19,533 | )  |  |   | (14,477 | )  |
| TotalNet Credit SwapRevenue                 |  | $                          | (8,198  | )  |  | $      | (3,030  | )  |
|                                             |

NetPremiums Earned

Net premiums earned were $11.2 million and $9.9million for the three months ended March 31, 2005 and 2004,respectively. Net premiums earnedinclude:

|              |                                     |
|--------------|-------------------------------------|
| •  | Premium income on credit swapssold; |

|              |                                                                        |
|--------------|------------------------------------------------------------------------|
| •  | Premium expense on credit swapspurchased as short-term investments;and |

|              |                                                                                              |
|--------------|----------------------------------------------------------------------------------------------|
| •  | Premium expense on credit swapspurchased to offset credit risk on certain credit swaps sold. |

The increase in net premiums earned was primarily driven by theincrease in the credit swaps sold portfolio from the 2004 period,slightly offset by an increase in the premiums paid for credit swaps

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purchased for short-term investment purposesin 2004. The table below shows the component parts of net premiumsearned for the three months ended March 31, 2005 and2004.

|                                                                                    |  |                            |        |         |  |        |        |         |  |  |
|------------------------------------------------------------------------------------|--|----------------------------|--------|---------|--|--------|--------|---------|--|--|
| ($in thousands)                                                                    |  | Three monthsended March31, |
|                                                                               |  | 2005                       |        | 2004    |
| Premiumincome on credit swapssold                                                  |  | $                          | 11,628 |    |  | $      | 10,010 |    |
| Premium expenseon credit swaps purchased as short-terminvestments                  |  |                       | (403   | )  |  |   | (122   | )  |
| Premiumexpense on credit swaps purchased to offset credit risk on certainswapssold |  |                       | (23    | )  |  |   | (23    | )  |
| TotalNet PremiumsEarned                                                            |  | $                          | 11,202 |    |  | $      | 9,865  |    |
|                                                                                    |

Premiumincome on credit swaps sold was higher for the three months ended March31, 2005 primarily as a result of the expansion in our credit swapportfolio. The notional amounts outstanding of credit swaps sold were$10.8 billion and $8.0 billion at March 31, 2005 and 2004,respectively.

The premium expense on credit swaps purchased asshort-term investments was $403 thousand and $122 thousand for thethree months ended March 31, 2005 and 2004, respectively. The notionalamounts outstanding on credit swaps purchased as short-term investmentswere $484.5 million and $125 million at March 31, 2005 and 2004,respectively.

The notional amounts of credit swaps that we hadpurchased to offset credit risk on certain swaps sold were $5.0 millionat March 31, 2005 and 2004.

Net Realized Gains (Losses) onCredit Swaps

Our business strategy is generally to hold swapswe sell until maturity. However, there are circumstances in which wemay terminate a credit swap prior to maturity, either as a result ofcredit considerations or in order to realize gains. We cannot identifyat the outset of any credit swap transaction whether the credit swapwill be terminated or otherwise disposed of prior to its maturity. Ifthe credit swaps we terminate are at attractive market values, we areable to realize gains. Terminating transactions also allows us toaccelerate premium receipts and provides for additional growth capacitywithin our credit swap portfolio. We terminated a limited amount ofcredit swaps at a gain in the first quarter of 2005, as compared withthe first quarter of 2004, as our criteria for early termination weregenerally not met. We terminated $5 million and $153 million notionalamount of credit swaps sold for the three months ended March 31, 2005and 2004, respectively. Net realized gains on the early termination ofcredit swaps were $119 thousand and $1.6 million for the three monthsended March 31, 2005 and 2004, respectively.

In certaincircumstances we will terminate a credit swap at a realized loss. Ingeneral, we terminate credit swaps at a loss where we perceive that thecredit quality of the underlying reference entity risk hasdeteriorated, and we wish to reduce or eliminate our exposure to thereference entity. We realized no losses for the three months endedMarch 31, 2005, and losses of $12 thousand for the three months endedMarch 31, 2004, through the termination of credit swaps to mitigate ourcredit exposure.

Where we have purchased credit protection as ashort-term investment, early termination of the credit swaps is afundamental part of the business strategy. We terminated $10 millionand $74 million notional amount of credit swaps purchased during thethree months ended March 31, 2005 and 2004, respectively, realizing anet gain of $14 thousand and $421 thousand, respectively.

Netrealized gains (losses) for the three months ended March 31, 2005 and2004 are summarized below:

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|                                                                              |  |                           |         |         |  |        |       |         |  |  |
|------------------------------------------------------------------------------|--|---------------------------|---------|---------|--|--------|-------|---------|--|--|
| ($in thousands)                                                              |  | Three monthsendedMarch31, |
|                                                                         |  | 2005                      |         | 2004    |
| Realizedgains on terminated credit swapssold                                 |  | $                         | 119     |    |  | $      | 1,173 |    |
| Realized losses onterminated credit swapssold                                |  |                      | — |    |  |   | (12   | )  |
| Realized gains onterminated credit swaps purchased as short-terminvestments  |  |                      | 21      |    |  |   | 436   |    |
| Realized losseson terminated credit swaps purchased as short-terminvestments |  |                      | (7      | )  |  |   | (15   | )  |
| TotalNet Realized Gains on creditswaps                                       |  | $                         | 133     |    |  | $      | 1,582 |    |
|                                                                              |

NetUnrealized Gains (Losses) on Credit Swaps

Net unrealized losseson credit swaps were $19.5  million for the three months endedMarch 31, 2005 as compared with $14.5  million for the threemonths ended March 31, 2004. Net unrealized gains or losses on creditswaps reflect the change in the fair value of our credit swapportfolio.

The unrealized gains (losses) on credit swaps soldand credit swaps purchased as short-term investments and for creditrisk offset purposes for the three months ended March 31, 2005 and 2004are summarizedbelow:

|                                                                                                |  |                            |         |         |  |        |         |         |  |  |
|------------------------------------------------------------------------------------------------|--|----------------------------|---------|---------|--|--------|---------|---------|--|--|
| ($in thousands)                                                                                |  | Three monthsended March31, |
|                                                                                           |  | 2005                       |         | 2004    |
| Netunrealized losses on credit swapssold                                                       |  | $                          | (19,963 | )  |  | $      | (14,967 | )  |
| Netunrealized gains on credit swaps purchased as short-terminvestments                         |  |                       | 407     |    |  |   | 450     |    |
| Net unrealizedgains on credit swaps purchased to offset credit risk on certain creditswapssold |  |                       | 23      |    |  |   | 40      |    |
| Nettotal Unrealized Losses on creditswaps                                                      |  | $                          | (19,533 | )  |  | $      | (14,477 | )  |
|                                                                                                |

Theincrease in unrealized losses on credit swaps sold from $15 millionduring the first quarter of 2004, to $20 million in the first quarterof 2005, is a result of increases in market credit swap premium levelsduring these quarters. For the three months ended March 31, 2005,unrealized gains were $407 thousand on the portfolio of credit swapspurchased as short-term investments, as compared with $450 thousand forthe three months ended March 31, 2004.

Asset ManagementFees

We commenced our third party asset management activityduring the latter part of 2004. For the three months ended March 31,2005, we recognized $42 thousand of asset management fees. Our assetmanagement contracts also provide for contingent performance fees, noneof which have been earned or accrued at March 31, 2005.

Interest Income Earned

We had interest income of $3.7million and $652  thousand for the three months ended March 31,2005 and 2004, respectively. The increased interest income isattributable to higher average invested balances subsequent to the July2004 issuance of subordinated debt and our IPO, coupled with higheryields in the cash equivalents and short-term investment accounts ascompared with the three month period ended March 31, 2004. Averageyields on the cash equivalent and short-term investments were3.1% in the three month period ended March 31, 2005 comparedwith 1.0% in the three month period ended March 31, 2004. Thisincrease is primarily due to a general increase in market interestrates in the latter part of 2004 and into 2005. Our cash, cashequivalents and short-term investments were approximately $483.2million and $264.2 million as of March 31, 2005 and 2004,respectively.

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Foreign currency revaluation

Westarted selling Euro-denominated credit swaps in February 2003 and byDecember 31, 2004, Euro-denominated credit swaps comprised 29.3%of the notional amount of our credit swaps sold portfolio. The Euro haddepreciated in value against the U.S. dollar by approximately 4.3% and 2.1% during the first quarter of 2004 and 2005,respectively, and this depreciation resulted in a net loss of $564thousand and $73 thousand for the three months ended March 31, 2005 and2004, respectively. The revaluation gain or loss is driven by theamount of Euro denominated currency on hand, and premiums received inEuros during the period.

Operating Expenses

Ouroperating expenses were $7.7  million and $5.3 million for thethree months ending March 31, 2005 and 2004, respectively, assummarized below:

|                                          |  |                            |       |        |  |        |       |        |  |  |
|------------------------------------------|--|----------------------------|-------|--------|--|--------|-------|--------|--|--|
| ($in thousands)                          |  | Three monthsended March31, |
|                                     |  | 2005                       |       | 2004   |
| Employeecompensation                     |  | $                          | 5,196 |   |  | $      | 3,423 |   |
| Professionaland legal fees               |  |                       | 954   |   |  |   | 415   |   |
| Fixed assetdepreciation andamortization  |  |                       | 516   |   |  |   | 474   |   |
| Technology anddatafeeds                  |  |                       | 317   |   |  |   | 307   |   |
| Other                                    |  |                       | 765   |   |  |   | 704   |   |
| TotalOperatingExpenses                   |  | $                          | 7,748 |   |  | $      | 5,323 |   |
| Numberof full-time employees, at yearend |  |                       | 31    |   |  |   | 29    |   |
|                                          |

The increase in employeecompensation over these periods was partially due to the increase inthe number of employees as the business expanded its operations,coupled with the related increased expense for stock compensation. Inaddition, in the first quarter of 2005 we accrued an additional expenseof approximately $800 thousand related to the accelerated compensationexpenses and accelerated vesting of stock related to the departure offormer employees. Professional and legal fees expense includes auditand tax advisor expenses, legal costs and director and officerinsurance expense. The increase in professional fees is related to theincreased director and officer insurance expense, and the increase inlegal fees, both as a result of increased requirements associated withour status as a public company. Fixed asset depreciation andamortization principally relate to the depreciation of our furnitureand fixtures, and the amortization of our internally developedsoftware. The slight increase in depreciation and amortization expenseis due to the increase in purchases of this nature. Technology and datafeed expense relates to the maintenance of our technology platform andthe cost of providing electronic data to our credit and investingteams, and remained fairly consistent with the prior period. Otheroperating expenses include rent, bank fees, rating agency fees,brokerage expense, travel and entertainment, exchange fees and otheradministrative expenses, which are fairly consistent with the priorperiod.

Interest Expense and Preferred Distributions

For the three months ended March 31, 2005, we incurred $482 thousandof interest expense on the $75.0 million 30-year subordinated debt thatwas issued by Primus Financial in July 2004. The interest rate for the30-year subordinated debt is fixed at 2.57% for a period of oneyear from the issuance date. Primus Financial also made netdistributions of $649 thousand and $542 thousand during the threemonths ended March 31, 2005 and 2004, respectively, on the PrimusFinancial Cumulative Preferred Stock issued in December 2002. Theaverage rate paid on these securities was 2.96% and 1.75%during the three months ended March 31, 2005 and 2004,respectively.

Income Taxes

Provision for income taxeswas $36 thousand and $72 thousand for the three months ended March 31,2005 and 2004, respectively. Primus Guaranty had a net deferred taxasset fully offset by a 

22

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valuation allowance of $9.3 million and $5.9million as of December 31, 2004 and 2003, respectively. The change inthe deferred tax asset and valuation allowance resulted from PrimusAsset Management's estimated net operating loss. As previouslydiscussed, it is expected that only the income of Primus AssetManagement and its subsidiary, Primus Re, are likely to be subject toUnited States federal and local income taxes. However, were PrimusBermuda to be subject to income tax, at a combined United Statesfederal, New York State and New York City income tax rate of46%, on its United States GAAP income, then its income taxexpense (excluding interest and penalties) would have beenapproximately $5.8 million and $3.8 million for the three months endedMarch 31, 2005 and 2004, respectively. These figures assume that PrimusFinancial is not deemed to be making distributions to Primus Bermuda;such distributions would subject Primus Bermuda to an additional UnitedStates federal branch profits tax.

Contractual Obligations

The following table summarizes our contractual obligations at March31, 2005 and the effect that those obligations are expected to have onour liquidity and cash flows in futureperiods:

|                                       |  |                     |        |                 |  |           |         |           |  |                  |         |           |  |        |         |           |  |        |        |        |  |  |
|---------------------------------------|--|---------------------|--------|-----------------|--|-----------|---------|-----------|--|------------------|---------|-----------|--|--------|---------|-----------|--|--------|--------|--------|--|--|
|                                  |  | Paymentdue byperiod |
|                                  |  | Total               |        | Lessthan 1 year |  | 1-3 years |         | 3-5 years |  | Morethan 5 years |
| PropertyLease                         |  | $                   | 5,575  |            |  | $         | 744     |      |  | $                | 1,513   |      |  | $      | 1,536   |      |  | $      | 1,782  |   |
| Subordinateddeferrable interest notes |  |                | 75,000 |            |  |      | — | (a)  |  |             | — | (a)  |  |   | — | (a)  |  |   | 75,000 |   |
| Total                                 |  | $                   | 80,575 |            |  | $         | 744     |      |  | $                | 1,513   |      |  | $      | 1,536   |      |  | $      | 76,782 |   |
|                                       |

|  |
|--|
|  |  |
|  |

|  |                                                                                                                                            |
|--|--------------------------------------------------------------------------------------------------------------------------------------------|
|  | (a)Payments on the subordinated deferrable interest notes for the nextfive years cannot be determined, as it is an auction rateobligation. |

Property Lease:    Primus Financialhas leased its premises at 360 Madison Avenue, New York, New York fromMadison 45 LLC at a fixed yearly rental (subject to certain escalationsspecified in the lease) until August 1, 2012. There are no materialrestrictions imposed by the lease agreement and the lease iscategorized as an operating lease.

Subordinated deferrableinterest notes:    For information on the terms of oursubordinated deferrable interest notes, see Note 7 to our consolidatedfinancial statements.

We have no other material long-termcontractual obligations.

Liquidity and Capital Resources

Capital Strategy

Primus Financial, in order tosupport its AAA/Aaa ratings, is required to maintain capital in anamount determined by the capital models it has agreed upon with S&Pand Moody's. The capital required is primarily a function ofPrimus Financial's credit swap portfolio characteristics,operating expenses and tax position. Retained cash flow and proceedsfrom financings to increase our capital resources to support our creditswap business.

In connection with the commencement of ouroperations on March 14, 2002, we were capitalized with $155.0 millionfrom the issuance of our Series A preferred stock to two subsidiariesof XL Capital Ltd, or XL, Transamerica Life Insurance Company, asubsidiary of AEGON USA, Pacific Corporate Group/CalPERS and RadianGroup Inc., or Radian. In connection with the issuance of the Series Apreferred stock, we issued warrants to Radian enabling them to purchase1,061,059 common shares at a exercise price of $5.18 per share. On May15, 2004, Radian exercised these warrants, as a result of which wereceived $5.5 million. Upon completion of our IPO, all of the Series Apreferred stock were converted into common shares of the company.

Primus Financial issued $110.0 million of Primus FinancialCumulative Preferred Stock on December 19, 2002 in two series, Series Iand Series II, to a trust, ("the Trust"). Inconjunction with 

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the receipt of the securities, the Trustissued $100.0 million of Money Market Preferred Securities CustodialReceipts, or MMP Receipts, in two series, Series A and Series B, tovarious institutional investors in a private placement. The Trust alsoissued $10.0 million of Variable Inverse Preferred Securities CustodialReceipts that were retained by Primus Financial. One series of MMPReceipts pays distributions every 28 days based on an auction rate seton the prior business day and the other series makes paymentsquarterly, based on an auction rate, which is currently set annually,and was last set in January 2005. After December 19, 2012, PrimusFinancial may redeem the securities, in whole or in part, on anydistribution date at the face amount plus accumulated and unpaiddividends. However, Primus Financial is not required to redeem thesecurities, nor is it required to establish a sinking fund. For thethree months ended March 31, 2005 and 2004, Primus Financial made netdistributions to the Trust's MMP Receipts of $649 thousand and$542 thousand, respectively.

Primus Financial issued $75.0million of subordinated deferrable interest notes on July 23, 2004. Thenotes are subordinated in right of payment to the prior payment in fullof all existing and future senior indebtedness of the company,including counterparty claims. The notes are redeemable at the optionof Primus Financial, in whole or in part, on any auction date, at aredemption price equal to 100% of the principal amount of thenotes to be redeemed, plus any accrued and unpaid interest thereon tothe redemption date. The interest rate on the notes is fixed at a rateof 2.57% for a period of one year. The notes mature in July2034.

Primus Guaranty completed an IPO on October 5, 2004,listing its shares on the NYSE. The company issued 9,143,493 shares ata price of $13.50. Proceeds to the company were $110.7 million, net ofthe underwriting discount and offering expenses. Primus Guarantyconcurrently contributed $60.0 million of the IPO proceeds to PrimusFinancial to support the growth of its credit swap business. PrimusGuaranty has invested the remaining net proceeds in short-term moneymarket instruments, pending utilization in its credit swap businessand/or other businesses related to the credit markets.

Additionally, as required by our operating guidelines, PrimusFinancial maintains a $37.5 million liquidity facility with HarrisTrust and Savings Bank, or Harris Trust. The purpose of the liquidityfacility is to provide Primus Financial with cash in the event it isobligated to purchase a Reference Entity's debt obligation as theresult of a credit event and could not liquidate its investments inorder to settle a purchase on a timely basis. The liquidity facilityrequires that Primus Financial have United States government securitiesavailable to pledge as collateral on any advances made under thefacility. The facility is renewable on an annual basis at the option ofPrimus Financial or Harris Trust. The facility has a maturity date ofMarch 31, 2006. As of March 31, 2005, there have been no credit eventsand there have been no borrowings under the facility.

We receivecash from the receipt of credit swap premiums, the net proceeds fromthe early termination of credit swaps, interest income earned on ourinvestment portfolio and capital raising activities. Cash has been usedto pay our operating expenses, administrative expenses, premiums oncredit swaps we have purchased and preferred share distributions. Ourcash, cash equivalents and short-term investments were approximately$483.2 and $482.1  million as of March 31, 2005 and December 31,2004, respectively.

Cash Flows

Cash flowsfrom operating activities – Net cash provided by operatingactivities was $4.4 million and $2.9 million for the three months endedMarch 31, 2005 and 2004, respectively. In the first quarter of 2005 wehad higher premium income as compared with the first quarter of 2004,due to the increased size of our credit swaps sold portfolio, however,this increase was offset by lower realized gains in the first quarterof 2005 as compared with the first quarter of 2004. In addition, due toour increased cash balance and higher interest rates, our interestincome was approximately $3 million higher for the three months endedMarch 31, 2005, as compared with the 2004 period.

Cash flowsfrom investing activities – Net cash provided by (used in)investing activities was $27.3 million and $(19.8) million for thethree months ended March 31, 2005 and 2004, respectively. This increasein cash was primarily due to the purchases of short-term investmentsduring the first quarter of 2004, compared with the sale of short-terminvestments during the first quarter of 2005.

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Cash flows from financing activities– Net cash used in financing activities was $3.1 million and$542 thousand for the three months ended March 31, 2005 and 2004,respectively. During the first quarter of 2005, we issued stock toemployees in connection with the vesting of stock compensation plans. Aportion of the shares were repurchased from the employees in order topay required withholding taxes, in the amount of approximately $2.4million, and subsequently retired.

With our current capitalresources and anticipated future credit swap premium receipts andinterest income, we believe we have sufficient liquidity to pay ouroperating expenses and preferred distributions over at least the nexttwelve months.

Additional Information

U.S. GAAPapplicable to derivative contracts requires us to account for thecredit swaps that we buy or sell at fair value. The fair value ofcredit swaps is primarily determined by market credit swap premiumlevels, as well as the size and tenor of our swaps, and interest ratesused to discount future cash flows. Premium levels, in turn, are drivenby a number of factors, including the number and size of marketparticipants willing to buy or sell credit protection at any given timeand the market's perception of credit risk over the life of aparticular credit swap. The latter is in turn a function ofmacroeconomic factors such as the overall state of the economy,corporate financial health and leverage, and geopolitical concerns. Asa general matter, given our strategy of holding credit swaps sold untilmaturity, we do not seek to manage our overall exposure to marketcredit swap premium levels by terminating credit swaps prior to theirmaturity. Accordingly, we expect fluctuations in the fair value of ourcredit swap portfolio as a result of changes in credit swap premiumsover time. These period-to-period changes in value have no significanteffect on our business, our economic performance or cash flow. However,reflecting our credit swap portfolio at fair value produces significantchanges in our revenue and net income from period to period as themarket values of our credit swaps fluctuate.

Despite ourstrategy of holding credit swaps sold to maturity, we occasionallydispose of credit swaps prior to maturity, but only in circumstanceswhere we believe that the underlying risk related to the credit swaphas increased beyond our risk tolerance or where we seek to rebalanceour portfolio and create greater capacity for other credit swaps. UnderUnited States GAAP, the full amount of any realized gains and losses onthe termination of credit swaps is included in our revenueimmediately.

In managing our business and assessing its growthand profitability from a strategic and financial planning perspective,we believe it is appropriate to consider both our United States GAAPfinancial results as well as the impact on those results of fair valueaccounting and the termination of credit swaps. Therefore, we evaluatewhat our economic results would have been if we excluded from revenuethe amounts of any unrealized gains and losses on our portfolio ofcredit swaps sold, and any realized gains from terminations of creditswaps sold prior to maturity, although we amortize those realized gainsover the remaining original lives of the terminated contracts. Ourboard of directors also uses these results in assessing ourmanagement's performance and determining compensation.

Forthe three months ended March 31, 2005 and 2004, we realized $119thousand and $1.2 million of gains, respectively, from the earlytermination of credit swaps sold. The amortized gains for those periodswere $1.6  million and $1.5 million, respectively. At March 31,2005, future amortization of gains from all credit swaps terminatedprior to that date will be recognized as follows (in thousands):

|                              |  |        |       |        |  |  |
|------------------------------|--|--------|-------|--------|--|--|
| Yearending December 31, 2005 |  | $      | 6,576 |   |
| Yearending December 31, 2006 |  |   | 6,523 |   |
| Year endingDecember 31, 2007 |  |   | 4,466 |   |
| Year endingDecember 31, 2008 |  |   | 410   |   |
| Year ending December31, 2009 |  |   | 15    |   |
|                              |

Recent AccountingPronouncements

In December 2004, the FASB issued SFAS 123R"Share-Based Payment." SFAS 123R replacesFASB Statement No. 123, "Accounting for Stock-BasedCompensation", and supersedes APB Opinion 

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No. 25, "Accounting for StockIssued to Employee." SFAS 123R eliminates the choice ofalternative accounting methods, and requires that all entities followthe fair value based method of SFAS 123. Public entities will berequired to apply Statement 123R as of the first annual reportingperiod that begins after June 15, 2005. The adoption of SFAS 123R isnot expected to have a significant impact on our financialstatements.

Cautionary Note Regarding Forward-LookingStatements

This quarterly report of Primus Guaranty includesstatements that are not historical or current facts and are"forward-looking statements" made pursuant tothe safe harbor provisions of the Private Securities Litigation ReformAct of 1995. The words "believe,""anticipate,""project," "plan,""expect," "intend,""will likely result," "lookingforward" or "will continue," andsimilar expressions identify forward-looking statements. Thesestatements are subject to certain risks and uncertainties that couldcause actual results to differ materially from historical earnings andthose presently anticipated or projected. Primus Guaranty cautionsreaders not to place undue reliance on any such forward-lookingstatements, which speak only to their respective dates. The followingare some of the factors that could affect financial performance orcould cause actual results to differ materially from estimatescontained in or underlying the Company's forward-lookingstatements:

|              |                                                                                                                           |
|--------------|---------------------------------------------------------------------------------------------------------------------------|
| •  | fluctuations in theeconomic, credit, interest rate or foreign currency environment in theUnited States (U.S.) and abroad; |

|              |                                                                           |
|--------------|---------------------------------------------------------------------------|
| •  | thelevel of activity within the national and international creditmarkets; |

|              |                                           |
|--------------|-------------------------------------------|
| •  | competitive conditions andpricing levels; |

|              |                                         |
|--------------|-----------------------------------------|
| •  | legislative andregulatory developments; |

|              |                            |
|--------------|----------------------------|
| •  | technologicaldevelopments; |

|              |                     |
|--------------|---------------------|
| •  | changes in taxlaws; |

|              |                                                                                                       |
|--------------|-------------------------------------------------------------------------------------------------------|
| •  | changes in international ornational political or economic conditions, including any terroristattacks; |

|              |                                                          |
|--------------|----------------------------------------------------------|
| •  | uncertainties that have notbeen identified at this time. |

The Company undertakes noobligation to publicly correct or update any forward-looking statementif it later becomes aware that such results are not likely to beachieved.

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Item3.    Quantitative and Qualitative Disclosures about Market Risk

Market risk represents the potential for losses that may result fromchanges in the value of a financial instrument as a consequence ofmarket conditions. Our primary market risk is increasing or decreasingmarket credit swap premium levels, which increase or decrease the fairvalue of our credit swap portfolio. Market credit swap premium levelschange as a result of specific events or news related to a ReferenceEntity, such as a change in a credit rating by any of the ratingagencies. Additionally, market credit swap premium levels can vary as aresult of changes in market sentiment. As a general matter, given ourstrategy of holding credit swaps sold until maturity, we do not seek tomanage our overall exposure to market credit swap premium levels, andwe expect fluctuations in the fair value of our credit swap portfolioas a result of these changes. In cases where we purchase credit swapsas short-term investments, we incur the cost of paying premiums untilwe terminate the purchased credit protection. We undertake thesetransactions in the expectation that the market credit swap premiumlevel for the Reference Entity will rise subsequent to our purchase ofprotection, but any gains realized upon termination may not suffice tooffset the premium expense we have incurred while holding the purchasedcredit protection. Indeed, the market credit swap premium level for theReference Entity may fall and we may incur termination losses as wellas premium expense as a result. The fair value of our credit swapspurchased will be affected by market credit swap premium levels, whichwill affect our net income. Currently, we purchase a limited amount ofcredit protection, relative to the size of our portfolio of creditswaps sold, and the cost of purchased credit protection does notmaterially impact our overall operating margin. The notional amountoutstanding on credit swaps we purchased as short-term investments was$484.5 million at March 31, 2005.

We face other market risks,which are likely to have a lesser impact upon our net income than thoseassociated with market credit swap premium level risk. These otherrisks include interest rate risk associated with market interest ratemovements. These movements may affect the value of our credit swapportfolio as our pricing model includes an interest rate component,which is used to discount future expected cash flows. Interest ratemovements may also affect the carrying value of our investments.

The Primus Financial Cumulative Preferred Stock pays distributionsthat are based upon the auction rate preferred market. A differencebetween the rates we pay in the auction rate preferred market and theinterest rates we receive on our investments may result in anadditional cost to our company. Assuming that auction results withrespect to the Primus Financial Cumulative Preferred Stock reflectprevailing short-term interest rates, each 25 basis point increase ordecrease in the level of those rates would increase or decrease PrimusFinancial's annual distribution cost by approximately $125,000for each of the Series A and Series B MMP Receipts, but would notaffect distributions on the Series B MMP Receipts as the interest andauction rate for such MMP Receipts were set for a one year period onJanuary 20, 2005.

In addition, interest rate movements mayincrease or decrease the interest expense we incur on our $75 millionof subordinated deferrable interest notes. A 25 basis point increase ordecrease in the level of those rates would have increased or decreasedPrimus Financial's interest expense by $47,000 for the threemonths ended March 31, 2005, however, during that period the interestrate on the subordinated deferrable interest notes was fixed for a oneyear period expiring in July of 2005. Conversely, since almost all ofPrimus Financial's $483.2 million cash balance is invested inshort-term assets, in the event of such an increase in short-terminterest rates, we would earn additional interest income. We also havesome exposure to currency rates as we have sold Euro-denominated creditswaps. As of March 31, 2005, we have kept the premiums received fromthese transactions in Euro-denominated money market accounts. The valueof the cash Euro balances is translated into United States dollars atcurrent spot rates. Changes in the value of the Euro compared with theUnited States dollar may have an impact on our net income. We do nothedge any interest rate or currency market risks.

Counterpartyrisk represents the potential for loss should one or more of ourcounterparties be unable to meet its obligations due to bankruptcy or asimilar event, which could adversely affect our results of operations.Our counterparties generally have investment grade credit ratings. AtMarch 31, 

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2005 and 2004, the notional amount of creditswaps outstanding with respect to our counterparties that had creditratings of below investment grade were $5 million and $12 million,respectively. The fair value of the above-mentioned credit swaps atMarch 31, 2005 and 2004 were $44 thousand and $43 thousand,respectively. The premiums on these transactions were fully prepaid bythe counterparties.

Item 4.    Controls and Procedures

The company has carried out an evaluation, under the supervision andwith the participation of the company's management, including theChief Executive Officer and Chief Financial Officer, of theeffectiveness of disclosure controls and procedures pursuant to rules13a-15 and 15-15d promulgated under the Securities and Exchange Act of1934 as of the end of the period covered by this report. Based on thatevaluation, the Chief Executive Officer and the Chief Financial Officerconcluded that the disclosure controls and procedures are effective toprovide reasonable assurance that all material information relating tothe company required to be filed in this report have been made known tothem in a timely fashion. There have been no changes in internalcontrol over financial reporting that occurred during the most recentfiscal quarter that have materially affected, or are reasonably likelyto affect, internal control over financial reporting.

Thecompany's management, including the Chief Executive Officer andthe Chief Financial Officer, does not expect that the company'sdisclosure controls or its internal controls can prevent all errors andall fraud. Further, the design of a control system must reflect thefact that there are resource constraints, and the benefits of controlsmust be considered relative to their costs. As a result of the inherentlimitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances offraud, if any, within the company have been detected. These inherentlimitations include the realities that judgments in decision-making arefaulty, and that breakdowns can occur because of simple error ormistake. As a result of the inherent limitations in a cost-effectivecontrol system, misstatements due to error or fraud may occur and notbe detected. Accordingly, the company's disclosure controls andprocedures are designed to provide reasonable, not absolute, assurancethat the disclosure controls and procedures are met.

PartII.    Other Information

Item 1.    Legal Proceedings

In the ordinary course of operating our business, we may encounter asignificant risk of litigation from time to time. However, we are notparty to nor currently aware of any material pending litigation.

Item 2.    Unregistered Sales of Equity Securities and Use ofProceeds

Use of Proceeds of Initial Public Offering

The effective date of our registration statement (Registration No.333-114818) filed on Form S-1 relating to our IPO of common shares wasSeptember 29, 2004. In our IPO, we registered and sold 9,143,493 commonshares, par value $.08 per share, at a price of $13.50 per share and anaggregate public offering price of $123,437,156 for the account of theCompany. In addition, there were registered and sold, for the accountof certain selling shareholders identified in the registrationstatement, 1,201,335 common shares at a price of $13.50 per share andan aggregate public offering price of $16,218,022. Our IPO was managedand underwritten by Lehman Brothers Inc., Morgan Stanley & Co.Incorporated, Credit Suisse First Boston LLC, UBS Investment Bank,William Blair & Company L.L.C. and Keefe Bruyette & Woods, Inc.The offering commenced on September 29, 2004 and closed on October 5,2004. Proceeds to us from our IPO, after deduction of the underwritingdiscounts and commissions payable by the company of approximately $8.64million and offering costs payable by the company of $4.1 million,totaled approximately $110.7 million. None of the expenses incurred andpaid by us in our IPO were direct or indirect payments to ourdirectors, officers, general 

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partners or their associates, to personsowning 10% or more of any class of our equity securities or,except as described below, to our affiliates. Of the $110.7 millionraised for the account of the company, approximately $60.0 million hasbeen used to provide additional working capital to our affiliate,Primus Financial, in order to increase its capacity to sell additionalcredit swaps. Primus Financial has invested this additional capital inaccordance with its operating guidelines in United States governmentagencies and money market instruments. We continue to expect that theremainder of the proceeds from the offering will be used as workingcapital and for general corporate purposes, including providingadditional capital to Primus Financial to enable it to further expandits credit swap business and to pursue opportunities in complementarybusinesses, such as asset management for third parties and sellingcredit swaps referencing a broader range of obligations, althoughspecific amounts have not been allocated for these additional purposes.Pending such uses, the balance of $50.7 million has been invested bythe company in United States government agencies and money marketinstruments. The occurrence of unforeseen events, opportunities orchanged business conditions, however, could cause us to use the netproceeds of our IPO in a manner other than as described above.

Item 3.    Defaults upon Senior Securities

None.

Item 4.    Submission of Matters to a Vote of SecurityHolders

We did not submit any matters to a vote of securityholders during the first quarter of 2005.

Item 5.    OtherInformation

None.

Item 6.    Exhibits

31.1    Rule 13a–14(a)/15d–14(a)Certification

31.2    Rule13a–14(a)/15d–14(a) Certification

|            |                                                                                                                      |
|------------|----------------------------------------------------------------------------------------------------------------------|
| 32.1  | Certification Pursuant to 18 U.S.C.Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-OxleyAct of 2002 |

SIGNATURES

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this Report to be signed on its behalf by the undersigned,thereunto duly authorized.

|        |  |                                                                                                 |  |  |  |  |  |  |  |  |
|--------|--|-------------------------------------------------------------------------------------------------|--|--|--|--|--|--|--|--|
|   |  | PRIMUSGUARANTY, LTD.                                                                            |
|   |  | /s/ RichardClaiden                                                                              |
|   |  | Richard ClaidenChief Financial Officer (Duly Authorized Officer andPrincipal Financial Officer) |
|        |

Date: May12, 2005

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