##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2008
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from  to  .
 Commission File Number: 001-32307
 
 Primus Guaranty, Ltd.
  Bermuda
    
    Not Required(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 Clarendon House
2 Church Street
Hamilton HM 11, Bermuda
 441-296-0519
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



Primus Guaranty, Ltd.
 Form 10-Q
  INDEX
 Part I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Statements of Financial Condition as of
June 30, 2008 (Unaudited) and December 31, 2007
    
    
    3Condensed Consolidated Statements of Operations (Unaudited) for the
three and six months ended June 30, 2008 and 2007
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2008 and 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    28Cautionary Statement Regarding Forward-Looking Information
    
    
    54Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    55Item 4. Controls and Procedures
    
    
    56Part II. Other InformationItem 1. Legal Proceedings
    
    
    56Item 1A. Risk Factors
    
    
    56Item 4. Submission of Matters to a Vote of Security Holders
    
    
    57Item 6. Exhibits
    
    
    57Signatures
    
    
    58Exhibit 12Exhibit 31.1Exhibit 31.2Exhibit 32
   2




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Part I. Financial Information
 
  Primus Guaranty, Ltd.
 
 Condensed Consolidated Statements of Financial Condition
 (in thousands except per share amounts)
 June 30,
    
    
    December 31,2008
    
    
    2007(unaudited)AssetsCash and cash equivalents
    
    $
    303,858
    
    
    $
    242,665Available-for-sale investments
    
    
    589,203
    
    
    
    617,631Accrued interest receivable
    
    
    6,134
    
    
    
    7,684Accrued premiums and receivables on credit and other swaps
    
    
    3,470
    
    
    
    4,187Unrealized gain on credit and other swaps, at fair value
    
    
    339
    
    
    
    606Fixed assets and software costs, net
    
    
    4,850
    
    
    
    5,036Debt issuance costs, net
    
    
    6,809
    
    
    
    6,965Other assets
    
    
    2,673
    
    
    
    3,872Total assets
    
    $
    917,336
    
    
    $
    888,646Liabilities and shareholders equityAccounts payable and accrued expenses
    
    $
    2,182
    
    
    $
    2,182Accrued compensation
    
    
    4,704
    
    
    
    5,957Interest payable
    
    
    369
    
    
    
    831Unrealized loss on credit and other swaps, at fair value
    
    
    986,492
    
    
    
    544,731Accrued premiums and payables on credit and other swaps
    
    
    
    
    
    
    1,770Long-term debt
    
    
    325,570
    
    
    
    325,904Restructuring liabilities
    
    
    
    
    
    
    1,709Other liabilities
    
    
    497
    
    
    
    503Total liabilities
    
    
    1,319,814
    
    
    
    883,587Preferred securities of subsidiary
    
    
    98,521
    
    
    
    98,521Commitments and contingenciesShareholders equity (deficit)Common shares, $0.08 par value, 62,500,000 shares
authorized, 45,226,856 and 45,035,593 shares issued and
outstanding at June 30, 2008 and December 31, 2007,
respectively
    
    
    3,618
    
    
    
    3,603Additional paid-in-capital
    
    
    282,587
    
    
    
    280,224Accumulated other comprehensive loss
    
    
    (7,152
    )
    
    
    (4,712
    )Retained earnings (deficit)
    
    
    (780,052
    )
    
    
    (372,577
    )Total shareholders equity (deficit)
    
    
    (500,999
    )
    
    
    (93,462
    )Total liabilities, preferred securities of subsidiary
and shareholders equity (deficit)
    
    $
    917,336
    
    
    $
    888,646
 See accompanying notes.
  3




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Primus Guaranty, Ltd.
 
 Condensed Consolidated Statements of Operations
 (in thousands except per share amounts)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(unaudited)
    
    
    (unaudited)RevenuesNet credit swap revenue (loss)
    
    $
    270,990
    
    
    $
    (15,995
    )
    
    $
    (392,625
    )
    
    $
    (20,872
    )Asset management and advisory fees
    
    
    1,090
    
    
    
    625
    
    
    
    2,180
    
    
    
    1,286Interest income
    
    
    6,319
    
    
    
    10,316
    
    
    
    15,513
    
    
    
    20,293Other trading revenue
    
    
    
    
    
    
    708
    
    
    
    
    
    
    
    1,967Foreign currency revaluation loss
    
    
    (102
    )
    
    
    (63
    )
    
    
    (127
    )
    
    
    (12
    )Total net revenues
    
    
    278,297
    
    
    
    (4,409
    )
    
    
    (375,059
    )
    
    
    2,662ExpensesCompensation and employee benefits
    
    
    5,964
    
    
    
    5,972
    
    
    
    12,155
    
    
    
    11,976Professional and legal fees
    
    
    1,281
    
    
    
    1,463
    
    
    
    2,304
    
    
    
    2,439Depreciation and amortization
    
    
    334
    
    
    
    370
    
    
    
    663
    
    
    
    947Technology and data
    
    
    900
    
    
    
    1,078
    
    
    
    2,011
    
    
    
    1,955Interest expense
    
    
    3,973
    
    
    
    4,859
    
    
    
    8,864
    
    
    
    9,721Other
    
    
    1,300
    
    
    
    1,410
    
    
    
    2,623
    
    
    
    2,945Total expenses
    
    
    13,752
    
    
    
    15,152
    
    
    
    28,620
    
    
    
    29,983Distributions on preferred securities of subsidiary
    
    
    1,942
    
    
    
    1,959
    
    
    
    3,747
    
    
    
    3,861Income (loss) before provision for income taxes
    
    
    262,603
    
    
    
    (21,520
    )
    
    
    (407,426
    )
    
    
    (31,182
    )Provision (benefit) for income taxes
    
    
    
    
    
    
    (4
    )
    
    
    49
    
    
    
    52Net income (loss) available to common shares
    
    $
    262,603
    
    
    $
    (21,516
    )
    
    $
    (407,475
    )
    
    $
    (31,234
    )Income (loss) per common share:Basic
    
    $
    5.81
    
    
    $
    (0.48
    )
    
    $
    (9.02
    )
    
    $
    (0.70
    )Diluted
    
    $
    5.78
    
    
    $
    (0.48
    )
    
    $
    (9.02
    )
    
    $
    (0.70
    )Average common shares outstanding:Basic
    
    
    45,225
    
    
    
    45,012
    
    
    
    45,166
    
    
    
    44,588Diluted
    
    
    45,406
    
    
    
    45,012
    
    
    
    45,166
    
    
    
    44,588
 See accompanying notes.
  4




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Primus Guaranty, Ltd.
 
 Condensed Consolidated Statements of Cash Flows
 (in thousands except per share amounts)
 Six Months EndedJune 30,2008
    
    
    2007(unaudited)Cash flows from operating activitiesNet loss
    
    $
    (407,475
    )
    
    $
    (31,234
    )Adjustments to reconcile net loss to net cash provided by operating activities:Non-cash items included in net loss:Depreciation and amortization
    
    
    663
    
    
    
    947Share compensation
    
    
    2,573
    
    
    
    2,248Net unrealized losses on credit and other swaps
    
    
    442,028
    
    
    
    58,996Net amortization of premium and discount on securities
    
    
    (1,128
    )
    
    
    (4,634
    )Amortization of debt issuance costs
    
    
    156
    
    
    
    156Distributions on preferred securities of subsidiary
    
    
    3,747
    
    
    
    3,861Increase (decrease) in cash resulting from changes in:Accrued interest receivable
    
    
    1,550
    
    
    
    (171
    )Accrued premiums and interest receivable on credit and other swaps
    
    
    717
    
    
    
    (755
    )Deposit and warehouse loan agreement
    
    
    
    
    
    
    (6,022
    )Warehouse loans held for securitization
    
    
    
    
    
    
    (336,278
    )Other assets
    
    
    865
    
    
    
    (3,459
    )Trading account assets
    
    
    
    
    
    
    1,334Accounts payable and accrued expenses
    
    
    
    
    
    
    (635
    )Accrued compensation
    
    
    (1,253
    )
    
    
    (4,752
    )Trading account liabilities
    
    
    
    
    
    
    (32
    )Accrued premiums and payables on credit and other swaps
    
    
    (1,770
    )
    
    
    Interest payable
    
    
    (462
    )
    
    
    (200
    )Restructuring liabilities
    
    
    (1,709
    )
    
    
    Other liabilities
    
    
    (6
    )
    
    
    51Net cash provided by (used in) operating activities
    
    
    38,496
    
    
    
    (320,579
    )Cash flows from investing activitiesFixed asset purchases and capitalized software costs
    
    
    (477
    )
    
    
    (1,064
    )Payments received from CLO investments
    
    
    2,063
    
    
    
    Purchases of available-for-sale investments
    
    
    (1,059,776
    )
    
    
    (413,731
    )Maturities and sales of available-for-sale investments
    
    
    1,084,890
    
    
    
    381,499Net cash provided by (used in) investing activities
    
    
    26,700
    
    
    
    (33,296
    )Cash flows from financing activitiesRepurchase and retirement of common shares
    
    
    (195
    )
    
    
    (1,142
    )Proceeds from exercise of options and issue of shares
    
    
    
    
    
    
    557Proceeds from exercise of warrants
    
    
    
    
    
    
    7,335Warehouse loan payable
    
    
    
    
    
    
    336,278Net preferred distributions of subsidiary
    
    
    (3,747
    )
    
    
    (3,861
    )Net cash provided by (used in) financing activities
    
    
    (3,942
    )
    
    
    339,167Net effect of exchange rate changes on cash
    
    
    (61
    )
    
    
    (5
    )Net increase (decrease) in cash
    
    
    61,193
    
    
    
    (14,713
    )Cash and cash equivalents at beginning of period
    
    
    242,665
    
    
    
    204,428Cash and cash equivalents at end of period
    
    $
    303,858
    
    
    $
    189,715Supplemental disclosuresCash paid for interest
    
    $
    9,171
    
    
    $
    9,815Cash paid for taxes
    
    $
    25
    
    
    $
    22
 See accompanying notes.
  5




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1. Organization and Basis of Presentation
       6




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Disclosures about Segments
of an Enterprise and Related Information.
   2. Recent Accounting Pronouncements
 Fair
Value Measurements
 The Fair Value Option for Financial Assets and
Liabilities
 Disclosures about Derivative Instruments and
Hedging Activities, an Amendment of FASB Statement No. 133 Accounting for Derivative Instruments and Hedging Activities
  7




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##### Table of Contents



3. Available-for-sale Investments
 Accounting for Certain Investments in Debt and Equity Securities
(SFAS 115) Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial
Assets (EITF 99-20).
  June 30, 2008Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueU.S. government agency obligations
    
    $
    565,741
    
    
    $
    304
    
    
    $
    (219
    )
    
    $
    565,826Collateralized loan obligations
    
    
    13,616
    
    
    
    
    
    
    
    (6,878
    )
    
    
    6,738Corporate debt securities
    
    
    17,024
    
    
    
    
    
    
    
    (429
    )
    
    
    16,595ABS bond
    
    
    61
    
    
    
    
    
    
    
    (17
    )
    
    
    44Total
    
    $
    596,442
    
    
    $
    304
    
    
    $
    (7,543
    )
    
    $
    589,203
 December 31, 2007Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueU.S. government agency obligations
    
    $
    607,663
    
    
    $
    480
    
    
    $
    (169
    )
    
    $
    607,974Collateralized loan obligations
    
    
    14,880
    
    
    
    
    
    
    
    (5,223
    )
    
    
    9,657Total
    
    $
    622,543
    
    
    $
    480
    
    
    $
    (5,392
    )
    
    $
    617,631
  8




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June 30, 2008Securities with Unrealized LossesLess than 12 Months
    
    
    12 Months or More
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesU.S. government agency obligations
    
    $
    418,954
    
    
    $
    (219
    )
    
    $
    
    
    
    $
    
    
    
    $
    418,954
    
    
    $
    (219
    )Collateralized loan obligations
    
    
    3,553
    
    
    
    (4,451
    )
    
    
    3,185
    
    
    
    (2,427
    )
    
    
    6,738
    
    
    
    (6,878
    )Corporate debt securities
    
    
    16,595
    
    
    
    (429
    )
    
    
    
    
    
    
    
    
    
    
    16,595
    
    
    
    (429
    )ABS bond
    
    
    44
    
    
    
    (17
    )
    
    
    
    
    
    
    
    
    
    
    44
    
    
    
    (17
    )Total
    
    $
    439,146
    
    
    $
    (5,116
    )
    
    $
    3,185
    
    
    $
    (2,427
    )
    
    $
    442,331
    
    
    $
    (7,543
    )
 December 31, 2007Securities with Unrealized LossesLess than 12 Months
    
    
    12 Months or More
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesU.S. government agency obligations
    
    $
    127,139
    
    
    $
    (59
    )
    
    $
    104,600
    
    
    $
    (110
    )
    
    $
    231,739
    
    
    $
    (169
    )Collateralized loan obligations
    
    
    5,302
    
    
    
    (3,065
    )
    
    
    4,355
    
    
    
    (2,158
    )
    
    
    9,657
    
    
    
    (5,223
    )Total
    
    $
    132,441
    
    
    $
    (3,124
    )
    
    $
    108,955
    
    
    $
    (2,268
    )
    
    $
    241,396
    
    
    $
    (5,392
    )
    9




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4 Net Credit Swap Revenues and Portfolio
 Overview
       10




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##### Table of Contents



Primus Financial
     Harrier/PRS Trading Strategies
   11




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##### Table of Contents



Consolidated Net Credit Swap Revenue (Loss) and Credit Swap Portfolio Information
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net premium income
    
    $
    27,239
    
    
    $
    20,304
    
    
    $
    54,550
    
    
    $
    38,826Realized gains
    
    
    
    
    
    
    4,893
    
    
    
    1,033
    
    
    
    7,688Realized losses
    
    
    (898
    )
    
    
    (5,385
    )
    
    
    (6,084
    )
    
    
    (8,552
    )Net change in unrealized gains (losses)
    
    
    244,649
    
    
    
    (35,807
    )
    
    
    (442,124
    )
    
    
    (58,834
    )Net credit swap revenue (loss)
    
    $
    270,990
    
    
    $
    (15,995
    )
    
    $
    (392,625
    )
    
    $
    (20,872
    )
  June 30,
    
    
    December 31,2008
    
    
    2007Gross Notional Amounts:Credit swaps sold-single name
    
    $
    19,116,761
    
    
    $
    18,260,653Credit swaps sold-tranche
    
    
    5,000,000
    
    
    
    4,700,000Credit swaps sold-ABS
    
    
    75,000
    
    
    
    80,000Credit swaps purchased-single name
    
    
    (16,610
    )
    
    
    (25,410
    )Fair value:Asset
    
    
    339
    
    
    
    606Liability
    
    
    986,492
    
    
    
    544,731Average
fair value:Asset
    
    
    720
    
    
    
    33,217Liability
    
    
    1,058,532
    
    
    
    165,087
   12




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June 30, 2008
    
    
    December 31, 2007Notional
    
    
    Fair
    
    
    Notional
    
    
    FairMoodys Rating Category
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueBy Single Name Reference
Entity/TrancheCredit Swaps Sold-Single Name:Aaa
    
    $
    593,163
    
    
    $
    (7,390
    )
    
    $
    828,504
    
    
    $
    (3,953
    )Aa
    
    
    3,507,683
    
    
    
    (70,496
    )
    
    
    3,832,904
    
    
    
    (91,863
    )A
    
    
    6,464,057
    
    
    
    (114,745
    )
    
    
    6,047,762
    
    
    
    (36,544
    )Baa
    
    
    7,507,104
    
    
    
    (153,903
    )
    
    
    6,882,813
    
    
    
    (22,162
    )Ba
    
    
    691,871
    
    
    
    (27,376
    )
    
    
    570,090
    
    
    
    (17,235
    )B
    
    
    352,883
    
    
    
    (69,525
    )
    
    
    71,080
    
    
    
    (2,390
    )Caa
    
    
    
    
    
    
    
    
    
    
    27,500
    
    
    
    (2,791
    )Total
    
    $
    19,116,761
    
    
    $
    (443,435
    )
    
    $
    18,260,653
    
    
    $
    (176,938
    )Credit Swaps Sold-Tranche:Aaa
    
    $
    4,050,000
    
    
    $
    (344,347
    )
    
    $
    3,450,000
    
    
    $
    (172,175
    )Aa
    
    
    500,000
    
    
    
    (58,048
    )
    
    
    950,000
    
    
    
    (94,312
    )A
    
    
    300,000
    
    
    
    (55,391
    )
    
    
    300,000
    
    
    
    (53,569
    )Baa
    
    
    150,000
    
    
    
    (31,259
    )
    
    
    
    
    
    
    Total
    
    $
    5,000,000
    
    
    $
    (489,045
    )
    
    $
    4,700,000
    
    
    $
    (320,056
    )Credit Swaps Sold-ABS (1):A
    
    $
    15,000
    
    
    $
    (9,867
    )
    
    $
    25,000
    
    
    $
    (12,821
    )Baa
    
    
    10,000
    
    
    
    (7,951
    )
    
    
    35,000
    
    
    
    (20,470
    )Ba
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    (11,353
    )B
    
    
    10,000
    
    
    
    (8,196
    )
    
    
    5,000
    
    
    
    (4,038
    )Caa
    
    
    40,000
    
    
    
    (31,169
    )
    
    
    
    
    
    
    Total
    
    $
    75,000
    
    
    $
    (57,183
    )
    
    $
    80,000
    
    
    $
    (48,682
    )Credit Swaps Purchased-Single Name:Aa
    
    $
    
    
    
    $
    
    
    
    $
    (8,160
    )
    
    $
    403A
    
    
    (8,160
    )
    
    
    2,112
    
    
    
    (12,380
    )
    
    
    335Baa
    
    
    (8,450
    )
    
    
    1,398
    
    
    
    (4,870
    )
    
    
    813Total
    
    $
    (16,610
    )
    
    $
    3,510
    
    
    $
    (25,410
    )
    
    $
    1,551
 (1)
    
     See note 6 Credit Events  CDS on ABS for further discussion.  13




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##### Table of Contents



By Counterparty Buyer / (Seller)Credit Swaps Sold-Single Name:Aaa
    
    $
    1,619,949
    
    
    $
    (38,454
    )
    
    $
    3,625,845
    
    
    $
    (34,091
    )Aa
    
    
    14,662,076
    
    
    
    (343,095
    )
    
    
    12,153,764
    
    
    
    (118,109
    )A
    
    
    1,804,254
    
    
    
    (42,816
    )
    
    
    2,481,044
    
    
    
    (24,738
    )Baa
    
    
    1,030,482
    
    
    
    (19,070
    )
    
    
    
    
    
    
    Total
    
    $
    19,116,761
    
    
    $
    (443,435
    )
    
    $
    18,260,653
    
    
    $
    (176,938
    )Credit Swaps Sold-Tranche:Aaa
    
    $
    
    
    
    $
    
    
    
    $
    400,000
    
    
    $
    (33,706
    )Aa
    
    
    4,550,000
    
    
    
    (429,906
    )
    
    
    3,850,000
    
    
    
    (246,490
    )A
    
    
    450,000
    
    
    
    (59,139
    )
    
    
    450,000
    
    
    
    (39,860
    )Total
    
    $
    5,000,000
    
    
    $
    (489,045
    )
    
    $
    4,700,000
    
    
    $
    (320,056
    )Credit Swaps Sold-ABS (1):Aaa
    
    $
    
    
    
    $
    
    
    
    $
    15,000
    
    
    $
    (10,241
    )Aa
    
    
    50,000
    
    
    
    (37,587
    )
    
    
    40,000
    
    
    
    (21,969
    )A
    
    
    25,000
    
    
    
    (19,596
    )
    
    
    25,000
    
    
    
    (16,472
    )Total
    
    $
    75,000
    
    
    $
    (57,183
    )
    
    $
    80,000
    
    
    $
    (48,682
    )Credit Swaps Purchased-Single Name:Aaa
    
    $
    
    
    
    $
    
    
    
    $
    (5,000
    )
    
    $
    383Aa
    
    
    (16,610
    )
    
    
    3,510
    
    
    
    (20,410
    )
    
    
    1,168Total
    
    $
    (16,610
    )
    
    $
    3,510
    
    
    $
    (25,410
    )
    
    $
    1,551
 (1)
    
     See note 6 Credit Events  CDS on ABS for further discussion.  14




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##### Table of Contents



June 30, 2008
    
    
    December 31, 2007Notional
    
    
    Fair
    
    
    Notional
    
    
    FairS&P Rating Category
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueBy Single Name Reference
Entity/TrancheCredit Swaps Sold-Single Name:AAA
    
    $
    697,408
    
    
    $
    (19,726
    )
    
    $
    1,071,504
    
    
    $
    (32,181
    )AA
    
    
    3,487,028
    
    
    
    (49,162
    )
    
    
    3,704,784
    
    
    
    (56,437
    )A
    
    
    7,150,876
    
    
    
    (113,735
    )
    
    
    6,550,733
    
    
    
    (42,398
    )BBB
    
    
    6,887,034
    
    
    
    (173,322
    )
    
    
    6,326,638
    
    
    
    (20,200
    )BB
    
    
    650,032
    
    
    
    (66,818
    )
    
    
    478,820
    
    
    
    (14,583
    )B
    
    
    212,326
    
    
    
    (19,098
    )
    
    
    128,174
    
    
    
    (11,139
    )CCC
    
    
    32,057
    
    
    
    (1,574
    )
    
    
    
    
    
    
    Total
    
    $
    19,116,761
    
    
    $
    (443,435
    )
    
    $
    18,260,653
    
    
    $
    (176,938
    )Credit Swaps Sold-Tranche:AAA
    
    $
    4,150,000
    
    
    $
    (352,689
    )
    
    $
    3,800,000
    
    
    $
    (212,582
    )AA
    
    
    250,000
    
    
    
    (37,005
    )
    
    
    700,000
    
    
    
    (67,998
    )A
    
    
    450,000
    
    
    
    (68,092
    )
    
    
    100,000
    
    
    
    (21,880
    )BBB
    
    
    150,000
    
    
    
    (31,259
    )
    
    
    100,000
    
    
    
    (17,596
    )Total
    
    $
    5,000,000
    
    
    $
    (489,045
    )
    
    $
    4,700,000
    
    
    $
    (320,056
    )Credit Swaps Sold-ABS (1):A
    
    $
    5,000
    
    
    $
    (2,668
    )
    
    $
    50,000
    
    
    $
    (29,921
    )BBB
    
    
    10,000
    
    
    
    (7,740
    )
    
    
    15,000
    
    
    
    (7,242
    )BB
    
    
    20,000
    
    
    
    (15,395
    )
    
    
    15,000
    
    
    
    (11,519
    )CCC
    
    
    40,000
    
    
    
    (31,380
    )
    
    
    
    
    
    
    Total
    
    $
    75,000
    
    
    $
    (57,183
    )
    
    $
    80,000
    
    
    $
    (48,682
    )Credit Swaps Purchased-Single Name:AA
    
    $
    
    
    
    $
    
    
    
    $
    (8,160
    )
    
    $
    403A
    
    
    (11,740
    )
    
    
    2,647
    
    
    
    (12,250
    )
    
    
    765BBB
    
    
    (4,870
    )
    
    
    863
    
    
    
    (5,000
    )
    
    
    383Total
    
    $
    (16,610
    )
    
    $
    3,510
    
    
    $
    (25,410
    )
    
    $
    1,551
 (1)
    
     See note 6 Credit Events  CDS on ABS for further discussion.  15




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##### Table of Contents



By Counterparty Buyer / (Seller)Credit Swaps Sold-Single Name:AAA
    
    $
    
    
    
    $
    
    
    
    $
    5,000
    
    
    $
    3AA
    
    
    14,072,545
    
    
    
    (287,293
    )
    
    
    14,367,841
    
    
    
    (131,277
    )A
    
    
    5,044,216
    
    
    
    (156,142
    )
    
    
    3,887,812
    
    
    
    (45,664
    )Total
    
    $
    19,116,761
    
    
    $
    (443,435
    )
    
    $
    18,260,653
    
    
    $
    (176,938
    )Credit Swaps Sold-Tranche:AA
    
    $
    4,550,000
    
    
    $
    (429,906
    )
    
    $
    4,250,000
    
    
    $
    (280,196
    )A
    
    
    450,000
    
    
    
    (59,139
    )
    
    
    450,000
    
    
    
    (39,860
    )Total
    
    $
    5,000,000
    
    
    $
    (489,045
    )
    
    $
    4,700,000
    
    
    $
    (320,056
    )Credit Swaps Sold-ABS (1):AA
    
    $
    50,000
    
    
    $
    (37,587
    )
    
    $
    55,000
    
    
    $
    (32,210
    )A
    
    
    25,000
    
    
    
    (19,596
    )
    
    
    25,000
    
    
    
    (16,472
    )Total
    
    $
    75,000
    
    
    $
    (57,183
    )
    
    $
    80,000
    
    
    $
    (48,682
    )Credit Swaps Purchased-Single Name:AA
    
    $
    (16,610
    )
    
    $
    3,510
    
    
    $
    (25,410
    )
    
    $
    1,551Total
    
    $
    (16,610
    )
    
    $
    3,510
    
    
    $
    (25,410
    )
    
    $
    1,551
 (1)
    
     See note 6 Credit Events  CDS on ABS for further discussion.   June 30, 2008
    
    
    December 31, 2007Notional
    
    
    Fair
    
    
    Notional
    
    
    FairCountry of Domicile
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueCredit Swaps Sold-Single NameBy Reference Entity:North America
    
    $
    9,603,795
    
    
    $
    (333,787
    )
    
    $
    9,531,846
    
    
    $
    (149,169
    )Europe
    
    
    8,616,966
    
    
    
    (92,147
    )
    
    
    7,837,807
    
    
    
    (21,719
    )Asia-Pacific
    
    
    717,000
    
    
    
    (13,134
    )
    
    
    712,000
    
    
    
    (4,791
    )Others
    
    
    179,000
    
    
    
    (4,367
    )
    
    
    179,000
    
    
    
    (1,259
    )Total
    
    $
    19,116,761
    
    
    $
    (443,435
    )
    
    $
    18,260,653
    
    
    $
    (176,938
    )By Counterparty:North America
    
    $
    9,605,502
    
    
    $
    (233,046
    )
    
    $
    9,431,827
    
    
    $
    (100,747
    )Europe
    
    
    9,369,259
    
    
    
    (208,790
    )
    
    
    8,686,826
    
    
    
    (75,709
    )Asia-Pacific
    
    
    132,000
    
    
    
    (1,623
    )
    
    
    132,000
    
    
    
    (534
    )Others
    
    
    10,000
    
    
    
    24
    
    
    
    10,000
    
    
    
    52Total
    
    $
    19,116,761
    
    
    $
    (443,435
    )
    
    $
    18,260,653
    
    
    $
    (176,938
    )
  16




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##### Table of Contents



Credit Swaps Sold-TrancheBy Counterparty:North America
    
    $
    600,000
    
    
    $
    (54,693
    )
    
    $
    
    
    
    $
    Europe
    
    
    4,400,000
    
    
    
    (434,352
    )
    
    
    4,700,000
    
    
    
    (320,056
    )Total
    
    $
    5,000,000
    
    
    $
    (489,045
    )
    
    $
    4,700,000
    
    
    $
    (320,056
    )Credit Swaps Sold-ABS(1)By Reference Entity:North America
    
    $
    75,000
    
    
    $
    (57,183
    )
    
    $
    80,000
    
    
    $
    (48,682
    )Total
    
    $
    75,000
    
    
    $
    (57,183
    )
    
    $
    80,000
    
    
    $
    (48,682
    )By Counterparty:North America
    
    $
    45,000
    
    
    $
    (34,096
    )
    
    $
    45,000
    
    
    $
    (24,418
    )Europe
    
    
    30,000
    
    
    
    (23,087
    )
    
    
    35,000
    
    
    
    (24,264
    )Total
    
    $
    75,000
    
    
    $
    (57,183
    )
    
    $
    80,000
    
    
    $
    (48,682
    )Credit Swaps Purchased-Single NameBy Reference Entity:North America
    
    $
    (16,610
    )
    
    $
    3,510
    
    
    $
    (25,410
    )
    
    $
    1,551Total
    
    $
    (16,610
    )
    
    $
    3,510
    
    
    $
    (25,410
    )
    
    $
    1,551By Counterparty:Europe
    
    $
    (16,610
    )
    
    $
    3,510
    
    
    $
    (25,410
    )
    
    $
    1,551Total
    
    $
    (16,610
    )
    
    $
    3,510
    
    
    $
    (25,410
    )
    
    $
    1,551
 (1)
    
     See note 6 Credit Events  CDS on ABS for further
discussion.  17




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##### Table of Contents



June 30, 2008
    
    
    December 31, 2007Notional
    
    
    Fair
    
    
    Notional
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueCredit Swaps Sold-Single NameYear of Maturity2008
    
    $
    390,032
    
    
    $
    (1,010
    )
    
    $
    1,180,401
    
    
    $
    (302
    )2009
    
    
    2,801,191
    
    
    
    (21,587
    )
    
    
    2,723,618
    
    
    
    (6,449
    )2010
    
    
    6,158,004
    
    
    
    (129,693
    )
    
    
    6,052,998
    
    
    
    (56,037
    )2011
    
    
    3,043,533
    
    
    
    (140,841
    )
    
    
    2,953,911
    
    
    
    (53,905
    )2012
    
    
    5,529,271
    
    
    
    (142,100
    )
    
    
    5,309,725
    
    
    
    (60,119
    )2013
    
    
    1,194,730
    
    
    
    (8,204
    )
    
    
    40,000
    
    
    
    (126
    )Total
    
    $
    19,116,761
    
    
    $
    (443,435
    )
    
    $
    18,260,653
    
    
    $
    (176,938
    )Credit Swaps Sold-TrancheYear of Maturity2012
    
    $
    1,000,000
    
    
    $
    (27,704
    )
    
    $
    1,000,000
    
    
    $
    (6,204
    )2013
    
    
    350,000
    
    
    
    (64,685
    )
    
    
    350,000
    
    
    
    (58,715
    )2014
    
    
    3,650,000
    
    
    
    (396,656
    )
    
    
    3,350,000
    
    
    
    (255,137
    )Total
    
    $
    5,000,000
    
    
    $
    (489,045
    )
    
    $
    4,700,000
    
    
    $
    (320,056
    )Credit Swaps Sold-ABS(1)Year of Maturity2010
    
    $
    10,000
    
    
    $
    (7,198
    )
    
    $
    10,000
    
    
    $
    (4,632
    )2011
    
    
    5,000
    
    
    
    (3,535
    )
    
    
    10,000
    
    
    
    (6,368
    )2012
    
    
    15,000
    
    
    
    (11,578
    )
    
    
    15,000
    
    
    
    (9,322
    )2013
    
    
    15,000
    
    
    
    (10,261
    )
    
    
    15,000
    
    
    
    (9,443
    )2014
    
    
    20,000
    
    
    
    (16,059
    )
    
    
    20,000
    
    
    
    (12,438
    )2016
    
    
    10,000
    
    
    
    (8,552
    )
    
    
    10,000
    
    
    
    (6,479
    )Total
    
    $
    75,000
    
    
    $
    (57,183
    )
    
    $
    80,000
    
    
    $
    (48,682
    )Credit Swaps
Purchased-Single NameYear of Maturity2012
    
    $
    
    
    
    $
    
    
    
    $
    (5,000
    )
    
    $
    3832014
    
    
    (16,610
    )
    
    
    3,510
    
    
    
    (20,410
    )
    
    
    1,168Total
    
    $
    (16,610
    )
    
    $
    3,510
    
    
    $
    (25,410
    )
    
    $
    1,551
 (1)
    
     See note 6 Credit Events  CDS on ABS for further discussion.  18




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##### Table of Contents



5. Financial Instruments and Fair Value Disclosures
    
    
    Level 1  Valuations based on unadjusted quoted prices in active markets for identical
assets or liabilities.
  
    
    Level 2  Valuations based on quoted prices in markets that are not considered to be
active; or valuations for which all significant inputs are observable or can be
corroborated by observable market data, either directly or indirectly.
  
    
    Level 3  Valuations based on significant unobservable inputs that are supported by
little or no market activity.
   19




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##### Table of Contents



Valuation Techniques  Credit Swaps
  
    
    The contractual terms of the swap contract, which include the Reference Entity, the
notional value, the maturity, the credit swap premium and the currency of the swap.
    
    Current market data, including credit swap premium levels pertinent to each Reference
Entity, market interest rates, foreign exchange rates, an estimate of mid-market prices to
exit prices, and for tranche transactions, estimates of the correlation of the underlying
Reference Entities within each tranche transaction to relevant credit swap indices.
    
    Valuation models, which are used to derive a fair value of credit swaps. Our valuation
models have been internally developed but are benchmarked against market-standard models.
    
    Consideration of the credit risk of our counterparties, as well as our own
nonperformance risk. SFAS No. 157 requires that our own nonperformance risk be considered
when determining the fair value of our liabilities, which include credit swaps.
    
    Fair value estimates of credit swaps from third party valuation services and/or credit
swap counterparties.
  
    
    For the single-name credit swaps, our valuation model uses mid-market credit swap
premium data obtained from an independent pricing service. The independent pricing service
obtains mid-market credit swap premium quotes from a number of dealers in the credit swap
market across a range of standard maturities and restructuring terms, and derives average
credit swap premium quotes on specific Reference Entities. We adjust the independent
mid-market credit swap premium quotes to derive exit price valuations.
    
    For tranche transactions, we obtain a mid-market valuation for each tranche transaction
using our tranche valuation model. The inputs to our valuation model include: current
credit swap premium quotes obtained from an independent pricing service on the Reference
Entities within the tranche, our traders estimate of correlation levels derived from
credit swap indices, current interest rates and estimated recovery values on the
securities issued by the underlying Reference Entities. We adjust the mid-market
valuations obtained from our model to exit price valuations, using quotes obtained from
our tranche counterparties.
    
    For credit swaps on ABS, we obtain mid-market valuations from an independent valuation
service and quotes from our counterparty. We adjust the mid-market valuations to obtain
exit price valuations.
  20




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##### Table of Contents



Valuation Techniques  Other Financial Instruments
  
    
    For cash and cash equivalents, which include deposits in banks and money market
accounts, the fair value of these instruments is based upon quoted market prices. The
Company does not adjust the quoted price for such instruments.
    
    For U.S. government agency obligations and commercial paper, the fair value is based
upon observable quoted market prices and benchmarked to third party quotes.
    
    For the interest rate swap, the fair value is based upon observable market data
including contractual terms, market prices and interest rates and is benchmarked to
multiple third party quotes.
    
    For the ABS bond, the fair value is based upon a valuation from an independent
valuation service, which estimates the value of the bond by utilizing a valuation model.
This model incorporates projected cash flows, including default, prepayment, recovery and
interest rate data.
    
    For the two CLO investments, the fair value is based upon a valuation model which
includes observable inputs, where available. The model calculates the present value of
expected cash flows using our best estimates of the key assumptions, including forecasted
credit losses, prepayment rates, forward yield curves and discount rates commensurate with
the risk involved. The valuation is benchmarked to third party quotes.
 Fair Value Measurements
    21




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##### Table of Contents



Quoted Pricesin
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significant
    
    
    
    
    
    
    Assets /for
    
    
    Observable
    
    
    Unobservable
    
    
    Counter-
    
    
    LiabilitiesIdentical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    party
    
    
    at Fair(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    Netting (*)
    
    
    ValueAssetsCash and cash equivalents
    
    $
    80,383
    
    
    $
    223,475
    
    
    $
    
    
    
    $
    
    
    
    $
    303,858Available-for-sale investments
    
    
    
    
    
    
    582,421
    
    
    
    6,782
    
    
    
    
    
    
    
    589,203Unrealized gain on credit swaps
    
    
    
    
    
    
    2,999
    
    
    
    
    
    
    
    (2,660
    )
    
    
    339Other assets
    
    
    
    
    
    
    570
    
    
    
    
    
    
    
    
    
    
    
    570Total Assets
    
    $
    80,383
    
    
    $
    809,465
    
    
    $
    6,782
    
    
    $
    (2,660
    )
    
    $
    893,970LiabilitiesUnrealized loss on credit swaps
    
    $
    
    
    
    $
    442,924
    
    
    $
    546,228
    
    
    $
    (2,660
    )
    
    $
    986,492Total Liabilities
    
    $
    
    
    
    $
    442,924
    
    
    $
    546,228
    
    
    $
    (2,660
    )
    
    $
    986,492
 (*)
    
     Represents the impact of counterparty netting across the levels of the fair value hierarchy.
Counterparty netting among positions classified within the same level is included in that level.  Three Months Ended
    
    
    Six Months EndedJune 30, 2008
    
    
    June 30, 2008Available-for-
    
    
    Unrealized Loss
    
    
    Available-for-Sale
    
    
    on Credit
    
    
    Sale
    
    
    Unrealized LossInvestments
    
    
    Swaps
    
    
    Investments
    
    
    on Credit SwapsBalance, beginning of period
    
    $
    7,021
    
    
    $
    (713,613
    )
    
    $
    9,657
    
    
    $
    (368,739
    )Realized losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,876Unrealized gains (losses)
    
    
    (239
    )
    
    
    167,385
    
    
    
    (2,999
    )
    
    
    (182,365
    )Purchases, sales, issuances and settlements
    
    
    
    
    
    
    
    
    
    
    124
    
    
    
    Transfers in and/or out of Level 3, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, end of period
    
    $
    6,782
    
    
    $
    (546,228
    )
    
    $
    6,782
    
    
    $
    (546,228
    )
  22




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##### Table of Contents



Fair Value Option
  6. Credit Events  CDS on ABS
     23




---



##### Table of Contents



7. Restructuring
   8. Earnings (Loss) per Share
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net earnings (loss) available
to common shareholders
    
    $
    262,603
    
    
    $
    (21,516
    )
    
    $
    (407,475
    )
    
    $
    (31,234
    )Weighted-average basic shares
outstanding
    
    
    45,225
    
    
    
    45,012
    
    
    
    45,166
    
    
    
    44,588Effect of dilutive instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Share options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted share units
    
    
    181
    
    
    
    
    
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dilutive potential shares
    
    
    181
    
    
    
    
    
    
    
    
    
    
    
    Weighted-average diluted shares
    
    
    45,406
    
    
    
    45,012
    
    
    
    45,166
    
    
    
    44,588Basic EPS
    
    $
    5.81
    
    
    $
    (0.48
    )
    
    $
    (9.02
    )
    
    $
    (0.70
    )Diluted EPS
    
    $
    5.78
    
    
    $
    (0.48
    )
    
    $
    (9.02
    )
    
    $
    (0.70
    )
  24




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##### Table of Contents



9. Share-Based Compensation
 Share-Based Payment
   June 30, 2008WeightedNumber
    
    
    Averageof
    
    
    ExerciseShares
    
    
    PriceOutstanding at December 31, 2007
    
    
    1,311,624
    
    
    $
    11.61Granted
    
    
    
    
    
    $
    Exercised
    
    
    
    
    
    $
    Forfeited
    
    
    (63,725
    )
    
    $
    11.87Outstanding at June 30, 2008
    
    
    1,247,899
    
    
    $
    11.60Exercisable at June 30, 2008
    
    
    602,700
    
    
    $
    11.23
  25




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##### Table of Contents



Share Options Outstanding
    
    
    Share Options ExercisableAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber
    
    
    Remaining
    
    
    Average
    
    
    Number
    
    
    Averageof
    
    
    Contractual
    
    
    Exercise
    
    
    of
    
    
    ExerciseRange of Exercise Prices
    
    Shares
    
    
    Life (Years)
    
    
    Price
    
    
    Shares
    
    
    Price$0.00 - $6.94
    
    
    65,625
    
    
    
    4.6
    
    
    $
    6.94
    
    
    
    65,625
    
    
    $
    6.94$6.95 - $9.76
    
    
    113,125
    
    
    
    5.6
    
    
    $
    9.76
    
    
    
    113,125
    
    
    $
    9.76$9.77 - $13.50
    
    
    1,069,149
    
    
    
    5.0
    
    
    $
    12.08
    
    
    
    423,950
    
    
    $
    12.29Total
    
    
    1,247,899
    
    
    
    
    
    
    
    
    
    
    
    602,700
   10. Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    262,603
    
    
    $
    (21,516
    )
    
    $
    (407,475
    )
    
    $
    (31,234
    )Foreign currency translation adjustments
    
    
    (15
    )
    
    
    (10
    )
    
    
    (61
    )
    
    
    (5
    )Change in net unrealized gains (losses)
on available-for-sale
 investments
    
    
    (1,103
    )
    
    
    (438
    )
    
    
    (2,379
    )
    
    
    208Total comprehensive income (loss)
    
    $
    261,485
    
    
    $
    (21,964
    )
    
    $
    (409,915
    )
    
    $
    (31,031
    )
  26




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##### Table of Contents



June 30,
    
    
    December 31,2008
    
    
    2007Balance at beginning of period
    
    $
    (4,712
    )
    
    $
    (2,375
    )Foreign currency translation adjustments
    
    
    (61
    )
    
    
    (18
    )Change in net unrealized losses on available-for-sale investments
    
    
    (2,379
    )
    
    
    (2,319
    )Balance at end of period
    
    $
    (7,152
    )
    
    $
    (4,712
    )
  27




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##### Table of Contents



Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following is a discussion and analysis of our financial condition and results of
operations. This discussion should be read in conjunction with our consolidated financial
statements and accompanying notes which appear in the Companys Annual Report on Form 10-K . It
contains forward-looking statements that involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking statements as a result of various
factors, including those discussed below and in the Companys Annual Report on Form 10-K ,
particularly under Item 1A Risk Factors and the heading Cautionary Note Regarding
Forward-Looking Statements.
 Business Overview
  Primus Financial
     28




---



##### Table of Contents



Primus Asset Management
  PRS Trading Strategies/Harrier
  Net Credit Swap Revenue (Loss)
     29




---



##### Table of Contents



30




---



##### Table of Contents



Credit Event  CDS on ABS
    Income Taxes
   31




---



##### Table of Contents



Critical Accounting Policies
 Valuation of Financial Instruments
    
    
    Level 1  Valuations based on unadjusted quoted prices in active markets for identical
assets or liabilities.
  
    
    Level 2  Valuations based on quoted prices in markets that are not considered to be
active; or valuations for which all significant inputs are observable or can be
corroborated by observable market data, either directly or indirectly.
  
    
    Level 3  Valuations based on significant unobservable inputs that are supported by
little or no market activity.
   32




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##### Table of Contents



Nonperformance Risk Adjustment
  Level 3 Assets and Liabilities
   Quoted Pricesin
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significant
    
    
    
    
    
    
    Assets /for
    
    
    Observable
    
    
    Unobservable
    
    
    Counter-
    
    
    LiabilitiesIdentical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    party
    
    
    at Fair(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    Netting (*)
    
    
    ValueTotal assets
    
    $
    80,383
    
    
    $
    809,465
    
    
    $
    6,782
    
    
    $
    (2,660
    )
    
    $
    893,970Percentage of total
assets measured
at fair value
    
    
    9.0
    %
    
    
    90.5
    %
    
    
    0.8
    %
    
    
    (0.3
    %)
    
    
    100
    %Total liabilities
    
    $
    
    
    
    $
    442,924
    
    
    $
    546,228
    
    
    $
    (2,660
    )
    
    $
    986,492Percentage of total
liabilities
measured at fair
value
    
    
    
    
    
    
    44.9
    %
    
    
    55.4
    %
    
    
    (0.3
    %)
    
    
    100
    %
 Valuation Techniques  Credit Swaps
  
    
    The contractual terms of the swap contract, which include the Reference Entity, the
notional value, the maturity, the credit swap premium and the currency of the swap.
    
    Current market data, including credit swap premium levels pertinent to each Reference
Entity, market interest rates, foreign exchange rates, an estimate of mid-market prices to
exit prices, and for tranche transactions, estimates of the correlation of the underlying
Reference Entities within each tranche transaction to relevant credit swap indices.
  33




---



##### Table of Contents




    
    Valuation models, which are used to derive a fair value of credit swaps. Our valuation
models have been internally developed but are benchmarked against market-standard models.
    
    Consideration of the credit risk of our counterparties, as well as our own
nonperformance risk. SFAS No. 157 requires that our own nonperformance risk be considered
when determining the fair value of our credit swaps.
    
    Fair value estimates of credit swap from third party valuation services and/or credit
swap counterparties.
  
    
    For the single-name credit swaps, our valuation model uses mid-market credit swap
premium data obtained from an independent pricing service. The independent pricing service
obtains mid-market credit swap premium quotes from a number of dealers in the credit swap
market across a range of standard maturities and restructuring terms, and derives average
credit swap premium quotes on specific Reference Entities. We adjust the independent
mid-market credit swap premium quotes to derive exit price valuations.
    
    For tranche transactions, we obtain a mid-market valuation for each tranche transaction
using our tranche valuation model. The inputs to our valuation model include: current
credit swap premium quotes obtained from an independent pricing service on the Reference
Entities within the tranche, our traders estimate of correlation levels derived from
credit swap indices, current interest rates and estimated recovery values on the
securities issued by the underlying Reference Entities. We adjust the mid-market
valuations obtained from our model to exit price valuations, using quotes obtained from
our tranche counterparties.
    
    For credit swaps on ABS, we obtain mid-market valuations from an independent valuation
service and quotes from our counterparty. We adjust the mid-market valuations to obtain
exit price valuations.
  34




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Valuation Techniques  Other Financial Instruments
  
    
    For cash and cash equivalents, which include deposits in banks and money market
accounts, the fair value of these instruments is based upon quoted market prices. The
Company does not adjust the quoted price for such instruments.
    
    For U.S. government agency obligations and commercial paper, the fair value is based
upon observable quoted market prices and benchmarked to third party quotes.
    
    For the interest rate swap, the fair value is based upon observable market data
including contractual terms, market prices and interest rates and is benchmarked to
multiple third party quotes.
    
    For the ABS bond, the fair value is based upon a valuation from an independent
valuation service, which estimates the value of the bond by utilizing a valuation model.
This model incorporates projected cash flows, including default, prepayment, recovery and
interest rate data.
    
    For the two CLO investments, the fair value is based upon a valuation model which
includes observable inputs, where available. The model calculates the present value of
expected cash flows using our best estimates of the key assumptions, including forecasted
credit losses, prepayment rates, forward yield curves and discount rates commensurate with
the risk involved. The valuation is benchmarked to third party quotes.
 Share-Based Employee Compensation Plans
 Share-Based Payment
   35




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Results of Operations
 Three Months Ended June 30, 2008 Compared With Three Months Ended June 30, 2007
 Overview
           36




---



##### Table of Contents



Net Credit Swap Revenue (Loss)
   Three Months EndedJune 30,2008
    
    
    2007Primus Financial
    
    $
    270,990
    
    
    $
    (15,484
    )Harrier/PRS Trading
    
    
    
    
    
    
    (511
    )Total consolidated net credit swap revenue (loss)
    
    $
    270,990
    
    
    $
    (15,995
    )
  Net Credit Swap Revenue  Primus Financial
   
    
    Net premiums earned;
    
    Net realized gains (losses) on credit swaps; and
    
    Net unrealized gains (losses) on credit swaps.
  Three Months EndedJune 30,2008
    
    
    2007Net premiums earned
    
    $
    27,239
    
    
    $
    20,176Net realized gains (losses) on credit swaps
    
    
    (898
    )
    
    
    521Net unrealized gains (losses) on credit swaps
    
    
    244,649
    
    
    
    (36,181
    )Total net credit swap revenue (loss)
    
    $
    270,990
    
    
    $
    (15,484
    )
  37




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Net Premiums Earned  Primus Financial
  
    
    Premium income on single name credit swaps sold;
    
    Premium income on tranches sold;
    
    Premium income on credit swaps sold on asset backed securities (ABS); and
    
    Net premium income on credit swaps undertaken to offset credit risk.
  Three Months EndedJune 30,2008
    
    
    2007Premium income on single name credit swaps sold
    
    $
    21,809
    
    
    $
    17,415Premium income on tranches sold
    
    
    5,147
    
    
    
    2,633Premium income on credit swaps sold on ABS
    
    
    273
    
    
    
    128Net premium income on credit swaps undertaken
to offset credit risk
    
    
    10
    
    
    
    Total net premiums earned
    
    $
    27,239
    
    
    $
    20,176
    Net Realized Gains (Losses) on Credit Swaps  Primus Financial
  Three Months EndedJune 30,2008
    
    
    2007Realized gains on terminated credit swaps sold
    
    $
    
    
    
    $
    1,771Realized losses on terminated credit swaps sold
    
    
    (898
    )
    
    
    (1,250
    )Total net realized gains (losses) on credit swaps
    
    $
    (898
    )
    
    $
    521
  38




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##### Table of Contents



Net Unrealized Gains (Losses) on Credit Swaps  Primus Financial
  Three Months EndedJune 30,2008
    
    
    2007Net unrealized gains (losses) on credit swaps sold
    
    $
    76,873
    
    
    $
    (13,317
    )Net unrealized gains (losses) on tranches sold
    
    
    172,416
    
    
    
    (18,142
    )Net unrealized losses on credit swaps sold on ABS
    
    
    (5,030
    )
    
    
    (4,722
    )Net unrealized gains on credit swaps undertaken to
offset credit risk
    
    
    390
    
    
    
    Total net unrealized gains (losses) on credit swaps
    
    $
    244,649
    
    
    $
    (36,181
    )
  39




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##### Table of Contents



Asset Management and Advisory Fees
    Interest Income
    Three Months EndedJune 30,2008
    
    
    2007Interest income
    
    $
    6,319
    
    
    $
    10,316Cash and cash equivalents
    
    $
    303,858
    
    
    $
    189,715Available-for-sale and trading account securities
    
    
    589,203
    
    
    
    635,188Total cash, cash equivalents, available-for-sale
and trading account securities
    
    $
    893,061
    
    
    $
    824,903
  40




---



##### Table of Contents



Other Trading Revenue
  Foreign currency revaluation loss
  Operating Expenses
  Three Months EndedJune 30,2008
    
    
    2007Compensation and employee benefits
    
    $
    5,964
    
    
    $
    5,972Professional and legal fees
    
    
    1,281
    
    
    
    1,463Depreciation and amortization
    
    
    334
    
    
    
    370Technology and data
    
    
    900
    
    
    
    1,078Other
    
    
    1,300
    
    
    
    1,410Total operating expenses
    
    $
    9,779
    
    
    $
    10,293Number of full-time employees, at end of period
    
    
    50
    
    
    
    60
    41




---



##### Table of Contents



Interest Expense and Preferred Distributions
     Income Taxes
   42




---



##### Table of Contents



Six Months Ended June 30, 2008 Compared With Six Months Ended June 30, 2007
 Overview
  Net Credit Swap Revenue (Loss)
   Six Months EndedJune 30,2008
    
    
    2007Primus Financial
    
    $
    (393,337
    )
    
    $
    (19,164
    )Harrier/PRS Trading
    
    
    712
    
    
    
    (1,708
    )Total consolidated net credit swap revenue (loss)
    
    $
    (392,625
    )
    
    $
    (20,872
    )
   43




---



##### Table of Contents



Net Credit Swap Loss  Primus Financial
   
    
    Net premiums earned;
 
    
    Net realized gains (losses) on credit swaps; and
 
    
    Net unrealized gains (losses) on credit swaps.
  Six Months EndedJune 30,2008
    
    
    2007Net premiums earned
    
    $
    54,534
    
    
    $
    38,577Net realized losses on credit swaps
    
    
    (5,747
    )
    
    
    (228
    )Net unrealized losses on credit swaps
    
    
    (442,124
    )
    
    
    (57,513
    )Total net credit swap loss
    
    $
    (393,337
    )
    
    $
    (19,164
    )
 Net Premiums Earned  Primus Financial
  
    
    Premium income on single name credit swaps sold;
 
    
    Premium income on tranches sold;
 
    
    Premium income on credit swaps sold on asset backed securities (ABS); and
 
    
    Net premium income on credit swaps undertaken to offset credit risk.
  Six Months EndedJune 30,2008
    
    
    2007Premium income on single name credit swaps sold
    
    $
    43,693
    
    
    $
    34,408Premium income on tranches sold
    
    
    10,270
    
    
    
    4,001Premium income on credit swaps sold on ABS
    
    
    553
    
    
    
    168Net premium income on credit swaps undertaken
to offset credit risk
    
    
    18
    
    
    
    Total net premiums earned
    
    $
    54,534
    
    
    $
    38,577
   44




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##### Table of Contents



Net Realized Gains (Losses) on Credit Swaps  Primus Financial
  Six Months EndedJune 30,2008
    
    
    2007Realized gains on terminated credit swaps sold
    
    $
    24
    
    
    $
    2,015Realized losses on terminated credit swaps sold
    
    
    (5,775
    )
    
    
    (2,243
    )Net realized gains on terminated credit swaps
undertaken to offset credit risk
    
    
    4
    
    
    
    Total net realized losses on credit swaps
    
    $
    (5,747
    )
    
    $
    (228
    )
   45




---



##### Table of Contents



Net Unrealized Gains (Losses) on Credit Swaps  Primus Financial
  Six Months EndedJune 30,2008
    
    
    2007Net unrealized losses on credit swaps sold
    
    $
    (265,388
    )
    
    $
    (21,359
    )Net unrealized losses on tranches sold
    
    
    (168,989
    )
    
    
    (30,305
    )Net unrealized losses on credit swaps sold on ABS
    
    
    (8,501
    )
    
    
    (5,849
    )Net unrealized gains on credit swaps undertaken
to offset credit risk
    
    
    754
    
    
    
    Total net unrealized losses on credit swaps
    
    $
    (442,124
    )
    
    $
    (57,513
    )
  Asset Management and Advisory Fees
    Interest Income
    46




---



##### Table of Contents



Six Months EndedJune 30,2008
    
    
    2007Interest income
    
    $
    15,513
    
    
    $
    20,293Cash and cash equivalents
    
    $
    303,858
    
    
    $
    189,715Available-for-sale and trading account securities
    
    
    589,203
    
    
    
    635,188Total cash, cash equivalents, available-for-sale
and trading account securities
    
    $
    893,061
    
    
    $
    824,903
 Other Trading Revenue
  Foreign currency revaluation loss
  Operating Expenses
  Six Months EndedJune 30,2008
    
    
    2007Compensation and employee benefits
    
    $
    12,155
    
    
    $
    11,976Professional and legal fees
    
    
    2,304
    
    
    
    2,439Depreciation and amortization
    
    
    663
    
    
    
    947Technology and data
    
    
    2,011
    
    
    
    1,955Other
    
    
    2,623
    
    
    
    2,945Total operating expenses
    
    $
    19,756
    
    
    $
    20,262Number of full-time employees, at end of period
    
    
    50
    
    
    
    60
  47




---



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Interest Expense and Preferred Distributions
      48




---



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Income Taxes
  Non-GAAP Financial Measures  Economic Results
   
    
    Unrealized gains (losses) on credit swaps sold by Primus Financial are excluded from
GAAP net income (loss);
 
    
    Realized gains from early termination of credit swaps sold by Primus Financial are
excluded from GAAP net income (loss) and;
 
    
    Realized gains from early termination of credit swaps sold by Primus Financial are
amortized over the period that would have been the remaining life of the credit swap, and
that amortization is added to GAAP net income (loss);
 
    
    Provision for credit events.
   49




---



##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007GAAP net income (loss)
    
    $
    262,603
    
    
    $
    (21,516
    )
    
    $
    (407,475
    )
    
    $
    (31,234
    )Adjustments:Less: Change in unrealized fair value of
credit swaps sold (gain) loss by Primus
Financial
    
    
    (244,649
    )
    
    
    36,181
    
    
    
    442,124
    
    
    
    57,513Less: Realized gains from early
termination of credit swaps sold by Primus
Financial
    
    
    
    
    
    
    (1,771
    )
    
    
    (24
    )
    
    
    (2,015
    )Add: Amortization of realized gains from
the early termination of credit swap sold
by Primus Financial
    
    
    548
    
    
    
    2,000
    
    
    
    1,280
    
    
    
    3,833Less: Provision for credit events
    
    
    
    
    
    
    
    
    
    
    (189
    )Add: Deduction against provision for
credit events
    
    
    
    
    
    
    
    
    
    
    4,875Net Economic Results
    
    $
    18,502
    
    
    $
    14,894
    
    
    $
    40,591
    
    
    $
    28,097Economic Results earnings per diluted share
    
    $
    0.41
    
    
    $
    0.33
    
    
    $
    0.90
    
    
    $
    0.63Economic Results weighted average common
shares outstanding  diluted
    
    
    45,406
    
    
    
    45,197
    
    
    
    45,219
    
    
    
    44,988
   Off-Balance Sheet Arrangements
   50




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##### Table of Contents



Contractual Obligations
  Payment Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsProperty leases
    
    $
    9,301
    
    
    $
    1,256
    
    
    $
    2,512
    
    
    $
    2,453
    
    
    $
    3,0807% senior notes
    
    
    125,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,000Interest on 7% senior notes (b)
    
    
    249,278
    
    
    
    8,750
    
    
    
    17,500
    
    
    
    17,500
    
    
    
    205,528Subordinated deferrable interest
notes
    
    
    200,000
    
    
    
    
    (a)
    
    
    
    (a)
    
    
    
    (a)
    
    
    200,000Total
    
    $
    583,579
    
    
    $
    10,006
    
    
    $
    20,012
    
    
    $
    19,953
    
    
    $
    533,608
 (a)
    
    Payments on the subordinated deferrable interest notes for the next five years cannot be
determined, as the notes are auction rate obligations.(b)
    
    Net interest payments on the $125 million, 7% senior notes will vary due to the interest rate
swap agreement. Property leases:
  Liquidity and Capital Resources
 Capital Strategy
    51




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##### Table of Contents



Cash Flows
 Cash flows from operating activities 
 Cash flows from investing activities 
 Cash flows from financing activities 
  Recent Accounting Pronouncements
 Fair
Value Measurements
  52




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##### Table of Contents



The Fair Value Option for Financial Assets and
Liabilities
 Disclosures about Derivative Instruments and
Hedging Activities, an Amendment of FASB Statement No. 133 Accounting for Derivative Instruments and Hedging Activities
  53




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##### Table of Contents



Cautionary Note Regarding Forward-Looking Statements
  
    
    fluctuations in the economic, credit, interest rate or foreign
currency environment in the United States and abroad;
 
    
    the level of activity within the national and international credit and capital markets;
 
    
    the level of activity in the leveraged buyout and private equity markets;
 
    
    competitive conditions and pricing levels;
 
    
    change in rating agency requirements or methodology;
 
    
    counterparty limits and risk;
 
    
    legislative and regulatory developments;
 
    
    technological developments;
 
    
    changes in tax laws;
 
    
    changes in international or national political or economic conditions,
including any terrorist attacks;
 
    
    uncertainties that have not been identified at this time.
   54




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
     55




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##### Table of Contents



Item 4. Controls and Procedures
   
 Part II. Other Information
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
   56




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
   For
    
    
    WithheldNominee directors:Paul S. Giordano
    
    
    37,194,090
    
    
    
    2,598,993Robert R. Lusardi
    
    
    37,199,803
    
    
    
    2,593,280John A. Ward, III
    
    
    37,201,603
    
    
    
    2,591,480
  For
    
    
    34,245,503Against
    
    
    1,537,567Abstain
    
    
    15,531
  For
    
    
    39,761,800Against
    
    
    22,419Abstain
    
    
    8,864
 
 Item 6. Exhibits
 12
    
    
    Ratio of Earnings to Combined Fixed Charges and Preferred Share Dividend Requirements31.1
    
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
  57




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##### Table of Contents



SIGNATURES
  PRIMUS GUARANTY, LTD./s/ Richard ClaidenRichard ClaidenChief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)   58




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description12
    
    
    Ratio of Earnings to Combined Fixed Charges and Preferred Share Dividend Requirements31.1
    
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
  59