##### 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 March 31, 2010
 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
(State or other jurisdiction of 
incorporation or organization)
    
    98-0402357
(I.R.S. Employer Identification No.)
 Clarendon House
2 Church Street
Hamilton HM 11, Bermuda
 441-296-0519
 Yes þ No o
 Yes o No o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 Yes o No 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
March 31, 2010 (Unaudited) and December 31, 2009
    
    
    3Condensed Consolidated Statements of Operations (Unaudited) for the
three months ended March 31, 2010 and 2009
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited) for the
three months ended March 31, 2010 and 2009
    
    
    5Condensed Consolidated Statements of Equity (Deficit) for the three months
ended March 31, 2010 (Unaudited) and year ended December 31, 2009
    
    
    6Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    31Cautionary Statement Regarding Forward Looking Information
    
    
    48Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    49Item 4. Controls and Procedures
    
    
    50Part II. Other InformationItem 1. Legal Proceedings
    
    
    50Item 1A. Risk Factors
    
    
    50Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    51Item 6. Exhibits
    
    
    51Signatures
    
    
    52Exhibit 12Exhibit 31.1Exhibit 31.2Exhibit 32
   2




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##### Table of Contents



Part I. Financial Information
 
 Item 1.
    
    Financial Statements
 Primus Guaranty, Ltd.
 
 Condensed Consolidated Statements of Financial Condition 
(Unaudited)
 (in thousands except share amounts)
 March 31,
    
    
    December 31,2010
    
    
    2009AssetsCash and cash equivalents
    
    $
    146,961
    
    
    $
    299,514Investments (includes $353,200 and $274,275 at fair value)
    
    
    353,370
    
    
    
    274,444Restricted cash and investments
    
    
    128,419
    
    
    
    127,116CLO cash and cash equivalents
    
    
    138,606
    
    
    
    CLO loans and securities, at fair value
    
    
    2,488,530
    
    
    
    CLO other assets
    
    
    28,516
    
    
    
    Accrued interest and premiums
    
    
    7,172
    
    
    
    6,163Unrealized gain on credit swaps, at fair value
    
    
    1,873
    
    
    
    2,207Goodwill and other intangible assets
    
    
    7,865
    
    
    
    8,017Other assets
    
    
    12,096
    
    
    
    15,286Total assets
    
    $
    3,313,408
    
    
    $
    732,747Liabilities and Equity (deficit)LiabilitiesAccounts payable and accrued expenses
    
    $
    2,923
    
    
    $
    7,855Unrealized loss on credit swaps, at fair value
    
    
    564,436
    
    
    
    691,905Payable for credit events
    
    
    5,327
    
    
    
    28,596CLO notes, at fair value
    
    
    2,208,804
    
    
    
    CLO other liabilities
    
    
    85,385
    
    
    
    Long-term debt
    
    
    233,865
    
    
    
    244,051Other liabilities
    
    
    18,815
    
    
    
    9,787Total liabilities
    
    
    3,119,555
    
    
    
    982,194Commitments and contingenciesEquity (deficit)Common shares, $0.08 par value, 62,500,000 shares authorized,
39,045,501 and 38,267,546 shares issued and outstanding at
March 31, 2010 and December 31, 2009
    
    
    3,124
    
    
    
    3,061Additional paid-in capital
    
    
    281,178
    
    
    
    280,685Accumulated other comprehensive income (loss)
    
    
    2,431
    
    
    
    2,148Retained earnings (deficit)
    
    
    (541,034
    )
    
    
    (628,443
    )Appropriated retained earnings from CLO consolidation
    
    
    355,052
    
    
    
    Total shareholders equity (deficit) of Primus Guaranty, Ltd.
    
    
    100,751
    
    
    
    (342,549
    )Preferred securities of subsidiary
    
    
    93,102
    
    
    
    93,102Total equity (deficit)
    
    
    193,853
    
    
    
    (249,447
    )Total liabilities and equity (deficit)
    
    $
    3,313,408
    
    
    $
    732,747
 See accompanying notes.
  3




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##### Table of Contents



Primus Guaranty, Ltd.
 
 Condensed Consolidated Statements of Operations 
(Unaudited)
 (in thousands except per share amounts)
 Three Months EndedMarch 31,2010
    
    
    2009RevenuesNet credit swap revenue
    
    $
    87,530
    
    
    $
    110,881Net CLO revenue
    
    
    77,593
    
    
    
    CLO interest income
    
    
    23,422
    
    
    
    Asset management and advisory fees
    
    
    291
    
    
    
    419Interest income
    
    
    2,700
    
    
    
    2,373Gain on retirement of long-term debt
    
    
    4,757
    
    
    
    5,759Impairment loss on investments
    
    
    
    
    
    
    (609
    )Other income (loss)
    
    
    69
    
    
    
    (76
    )Total revenues
    
    
    196,362
    
    
    
    118,747ExpensesCLO interest expense
    
    
    5,837
    
    
    
    CLO other expenses
    
    
    990
    
    
    
    Compensation and employee benefits
    
    
    5,425
    
    
    
    4,715Professional and legal fees
    
    
    1,639
    
    
    
    1,421Interest expense
    
    
    1,869
    
    
    
    2,758Other
    
    
    3,536
    
    
    
    1,959Total expenses
    
    
    19,296
    
    
    
    10,853Income before provision for income taxes
    
    
    177,066
    
    
    
    107,894Provision for income taxes
    
    
    143
    
    
    
    142Net income
    
    
    176,923
    
    
    
    107,752Distributions on preferred securities of subsidiary
    
    
    988
    
    
    
    944Less: Net income attributable to non-parent interests in CLOs
    
    
    89,413
    
    
    
    Net income available to common shares
    
    $
    86,522
    
    
    $
    106,808Income per common share:Basic
    
    $
    2.24
    
    
    $
    2.61Diluted
    
    $
    2.15
    
    
    $
    2.61Average common shares outstanding:Basic
    
    
    38,686
    
    
    
    40,861Diluted
    
    
    40,280
    
    
    
    40,888
 See accompanying notes.
  4




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Primus Guaranty, Ltd.
 
 Condensed Consolidated Statements of Cash Flows 
(Unaudited)
 (in thousands)
 Three Months EndedMarch 31,2010
    
    
    2009Cash flows from operating activitiesNet income available to common shares
    
    $
    86,522
    
    
    $
    106,808Net income attributable to non-parent interests in CLOs
    
    
    89,413
    
    
    
    Distributions on preferred securities of subsidiary
    
    
    988
    
    
    
    944Net income
    
    
    176,923
    
    
    
    107,752Adjustments to reconcile net income to net cash used in operating activities:Non-cash items included in net income:Net unrealized gains on CLO loans and securities
    
    
    (62,077
    )
    
    
    Net unrealized losses on CLO notes
    
    
    14,143
    
    
    
    Net realized gains by the CLOs
    
    
    (26,758
    )
    
    
    Net unrealized gains on credit swaps
    
    
    (127,136
    )
    
    
    (122,890
    )Gain on retirement of long-term debt
    
    
    (4,757
    )
    
    
    (5,759
    )Impairment loss on available-for-sale investments
    
    
    
    
    
    
    609Other
    
    
    2,574
    
    
    
    829Increase (decrease) in cash resulting from changes in:CLO cash and cash equivalents
    
    
    (46,468
    )
    
    
    CLO other assets
    
    
    11,317
    
    
    
    CLO other liabilities
    
    
    41,969
    
    
    
    Restricted cash
    
    
    (993
    )
    
    
    Accrued interest and premiums
    
    
    (1,009
    )
    
    
    1,932Other assets
    
    
    2,068
    
    
    
    939Trading account assets
    
    
    (26,698
    )
    
    
    110Accounts payable and accrued expenses
    
    
    (4,932
    )
    
    
    (144
    )Payable for credit events
    
    
    (23,269
    )
    
    
    9,530Other liabilities
    
    
    9,027
    
    
    
    (27
    )Net cash used in operating activities
    
    
    (66,076
    )
    
    
    (7,119
    )Cash flows from investing activitiesProceeds from sale of CLO loans and securities
    
    
    222,496
    
    
    
    Purchases of CLO loans and securities
    
    
    (228,413
    )
    
    
    Payments received from CLO investments
    
    
    
    
    
    
    94Purchases of available-for-sale investments
    
    
    (78,928
    )
    
    
    Maturities and sales of available-for-sale investments
    
    
    22,716
    
    
    
    252,196Net cash provided by (used in) investing activities
    
    
    (62,129
    )
    
    
    252,290Cash flows from financing activitiesRepayment of CLO notes by the CLOs
    
    
    (15,623
    )
    
    
    Retirement of long-term debt
    
    
    (6,665
    )
    
    
    (4,351
    )Purchase and retirement of common shares
    
    
    (1,034
    )
    
    
    (1,252
    )Net preferred distributions of subsidiary
    
    
    (988
    )
    
    
    (944
    )Net cash used in financing activities
    
    
    (24,310
    )
    
    
    (6,547
    )Net effect of exchange rate changes on cash
    
    
    (38
    )
    
    
    (75
    )Net increase (decrease) in cash
    
    
    (152,553
    )
    
    
    238,549Cash and cash equivalents at beginning of period
    
    
    299,514
    
    
    
    280,912Cash and cash equivalents at end of period
    
    $
    146,961
    
    
    $
    519,461Supplemental disclosuresCash paid for interest
    
    $
    738
    
    
    $
    2,833Cash paid for taxes
    
    $
    40
    
    
    $
    8
 See accompanying notes.
  5




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Primus Guaranty, Ltd.
 
 Condensed Consolidated Statements of Equity (Deficit) (Unaudited)
 (in thousands)
 Three Months Ended
    
    
    Year EndedMarch 31, 2010
    
    
    December 31, 2009Common sharesBalance at beginning of period
    
    $
    3,061
    
    
    $
    3,263Common shares purchased and retired
    
    
    (10
    )
    
    
    (275
    )Shares issued under employee compensation plans
    
    
    73
    
    
    
    73Balance at end of period
    
    
    3,124
    
    
    
    3,061Additional paid-in capitalBalance at beginning of period
    
    
    280,685
    
    
    
    281,596Common shares purchased and retired
    
    
    (1,097
    )
    
    
    (10,150
    )Shares vested under employee compensation plans
    
    
    1,590
    
    
    
    4,728Preferred shares purchased by subsidiary
    
    
    
    
    
    
    4,511Balance at end of period
    
    
    281,178
    
    
    
    280,685Accumulated other comprehensive income (loss)Balance at beginning of period
    
    
    2,148
    
    
    
    908Adoption of ASC Topic 810, Consolidation
    
    
    (1,061
    )
    
    
    Foreign currency translation adjustments
    
    
    (38
    )
    
    
    232Change in unrealized holding gains on available-for-sale securities
    
    
    1,382
    
    
    
    1,008Balance at end of period
    
    
    2,431
    
    
    
    2,148Retained earnings (deficit)Balance at beginning of period
    
    
    (628,443
    )
    
    
    (2,088,723
    )Adoption of ASC Topic 810, Consolidation
    
    
    887
    
    
    
    Net income
    
    
    176,923
    
    
    
    1,463,697Net income attributable to non-parent interests
    
    
    (89,413
    )
    
    
    Distributions on preferred securities of subsidiary
    
    
    (988
    )
    
    
    (3,417
    )Balance at end of period
    
    
    (541,034
    )
    
    
    (628,443
    )Appropriated retained earnings from CLO consolidationAdoption of ASC Topic 810, Consolidation
    
    
    265,639
    
    
    
    Net income attributable to non-parent interests in CLOs
    
    
    89,413
    
    
    
    Balance at end of period
    
    
    355,052
    
    
    
    Total shareholders equity (deficit) of Primus Guaranty, Ltd.
    
    
    100,751
    
    
    
    (342,549
    )Preferred securities of subsidiaryBalance at beginning of period
    
    
    93,102
    
    
    
    98,521Net purchase of preferred shares
    
    
    
    
    
    
    (5,419
    )Balance at end of period
    
    
    93,102
    
    
    
    93,102Total equity (deficit) at end of period
    
    $
    193,853
    
    
    $
    (249,447
    )
 See accompanying notes.
  6




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##### Table of Contents



Primus Guaranty, Ltd.
 
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 1. Organization
 Consolidation
 Consolidation
   2. Summary of Significant Accounting Policies
 Accounting Standards Codification
 Generally Accepted Accounting Principles
  7




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Notes to Condensed Consolidated Financial Statements (Unaudited)
 Basis of Presentation
    Impact of Adoption of ASC Topic 810, Consolidation
 Consolidation
    8




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Notes to Condensed Consolidated Financial Statements (Unaudited)
  Appropriated Retained Earnings from CLO Consolidations
 Consolidation
 Principles of Consolidation
  Other Recent Accounting Pronouncements
 Fair Value Measurements and Disclosures
(Topic 820)  Improving Disclosures about Fair Value Measurements
  9




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Notes to Condensed Consolidated Financial Statements (Unaudited)
 3. Investments
  March 31, 2010Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAvailable-for-sale:Corporate debt securities
    
    $
    322,773
    
    
    $
    3,044
    
    
    $
    (467
    )
    
    $
    325,350ABS bonds
    
    
    1,224
    
    
    
    
    
    
    
    (72
    )
    
    
    1,152Total available-for-sale
    
    
    323,997
    
    
    
    3,044
    
    
    
    (539
    )
    
    
    326,502Trading:Corporate loans and debt securities
    
    
    26,673
    
    
    
    123
    
    
    
    (98
    )
    
    
    26,698Total trading
    
    
    26,673
    
    
    
    123
    
    
    
    (98
    )
    
    
    26,698Held-to-maturity:Certificate of deposit
    
    
    170
    
    
    
    
    
    
    
    
    
    
    
    170Total held-to-maturity
    
    
    170
    
    
    
    
    
    
    
    
    
    
    
    170Total investments
    
    $
    350,840
    
    
    $
    3,167
    
    
    $
    (637
    )
    
    $
    353,370
 December 31, 2009Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAvailable-for-sale:Corporate debt securities
    
    $
    271,809
    
    
    $
    1,784
    
    
    $
    (662
    )
    
    $
    272,931Investments in CLOs under management
    
    
    203
    
    
    
    1,062
    
    
    
    
    
    
    
    1,265ABS bonds
    
    
    84
    
    
    
    
    
    
    
    (5
    )
    
    
    79Total available-for-sale
    
    
    272,096
    
    
    
    2,846
    
    
    
    (667
    )
    
    
    274,275Held-to-maturity:Certificate of deposit
    
    
    169
    
    
    
    
    
    
    
    
    
    
    
    169Total held-to-maturity
    
    
    169
    
    
    
    
    
    
    
    
    
    
    
    169Total investments
    
    $
    272,265
    
    
    $
    2,846
    
    
    $
    (667
    )
    
    $
    274,444
     10




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Notes to Condensed Consolidated Financial Statements (Unaudited)
  March 31, 2010Securities with Unrealized LossesLess than 12 Months
    
    
    12 Months or More
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesCorporate debt securities
    
    $
    97,875
    
    
    $
    (353
    )
    
    $
    2,394
    
    
    $
    (114
    )
    
    $
    100,269
    
    
    $
    (467
    )ABS bonds
    
    
    1,224
    
    
    
    (72
    )
    
    
    
    
    
    
    
    
    
    
    1,224
    
    
    
    (72
    )Total
    
    $
    99,099
    
    
    $
    (425
    )
    
    $
    2,394
    
    
    $
    (114
    )
    
    $
    101,493
    
    
    $
    (539
    )
 December 31, 2009Securities with Unrealized LossesLess than 12 Months
    
    
    12 Months or More
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesCorporate debt securities
    
    $
    121,983
    
    
    $
    (405
    )
    
    $
    2,248
    
    
    $
    (257
    )
    
    $
    124,231
    
    
    $
    (662
    )ABS bonds
    
    
    79
    
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    79
    
    
    
    (5
    )Total
    
    $
    122,062
    
    
    $
    (410
    )
    
    $
    2,248
    
    
    $
    (257
    )
    
    $
    124,310
    
    
    $
    (667
    )
    11




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
 4. Credit Swaps
 Net Credit Swap Revenue
    Three Months EndedMarch 31,2010
    
    
    2009Net premium income
    
    $
    16,436
    
    
    $
    22,469Realized losses
    
    
    (56,042
    )
    
    
    (34,478
    )Net change in unrealized gains
    
    
    127,136
    
    
    
    122,890Net credit swap revenue
    
    $
    87,530
    
    
    $
    110,881
 Credit Events and Terminations of Credit Swaps
  Three Months EndedMarch 31,2010
    
    
    2009Realized losses on single name credit swaps
    
    $
    (19,223
    )
    
    $
    (9,850
    )Realized losses on tranches
    
    
    (35,000
    )
    
    
    Realized losses on CDS on ABS
    
    
    (1,819
    )
    
    
    (24,628
    )Total realized losses
    
    $
    (56,042
    )
    
    $
    (34,478
    )
  12




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
 Single Name Credit Swaps
   Tranches
  CDS on ABS
  Counterparty Default  Lehman Brothers Special Financing Inc.
  Credit Swap Portfolio Information
   13




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
 March 31, 2010
    
    
    December 31, 2009Notional
    
    
    Fair
    
    
    Notional
    
    
    FairMoodys Rating Category
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueBy Single Name Reference Entity/TrancheCredit Swaps Sold-Single Name:Aaa
    
    $
    235,530
    
    
    $
    (2,804
    )
    
    $
    242,963
    
    
    $
    (5,131
    )Aa
    
    
    1,864,740
    
    
    
    (11,014
    )
    
    
    2,031,359
    
    
    
    (9,633
    )A
    
    
    4,745,154
    
    
    
    (6,027
    )
    
    
    5,012,922
    
    
    
    (8,289
    )Baa
    
    
    4,517,260
    
    
    
    (7,472
    )
    
    
    4,666,038
    
    
    
    (9,188
    )Ba
    
    
    773,001
    
    
    
    (12,412
    )
    
    
    848,426
    
    
    
    (16,225
    )B
    
    
    122,265
    
    
    
    (5,015
    )
    
    
    230,642
    
    
    
    (12,642
    )Caa
    
    
    120,000
    
    
    
    (5,675
    )
    
    
    40,000
    
    
    
    (268
    )Ca
    
    
    97,815
    
    
    
    (68,161
    )
    
    
    198,087
    
    
    
    (105,803
    )C
    
    
    35,000
    
    
    
    (20,466
    )
    
    
    
    
    
    
    D
    
    
    28,500
    
    
    
    (14,957
    )
    
    
    41,000
    
    
    
    (21,868
    )Non rated
    
    
    16,755
    
    
    
    39
    
    
    
    56,482
    
    
    
    (628
    )Total
    
    $
    12,556,020
    
    
    $
    (153,964
    )
    
    $
    13,367,919
    
    
    $
    (189,675
    )Credit Swaps Sold-Tranche:Aaa
    
    $
    575,000
    
    
    $
    (21,012
    )
    
    $
    575,000
    
    
    $
    (24,292
    )Aa
    
    
    2,275,000
    
    
    
    (208,599
    )
    
    
    2,275,000
    
    
    
    (218,226
    )A
    
    
    300,000
    
    
    
    (38,450
    )
    
    
    300,000
    
    
    
    (37,719
    )Baa
    
    
    550,000
    
    
    
    (80,044
    )
    
    
    550,000
    
    
    
    (78,879
    )Ba
    
    
    50,000
    
    
    
    (8,008
    )
    
    
    100,000
    
    
    
    (17,373
    )B
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    (45,393
    )Caa
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    (21,208
    )Ca
    
    
    50,000
    
    
    
    (30,174
    )
    
    
    50,000
    
    
    
    (32,594
    )Total
    
    $
    3,800,000
    
    
    $
    (386,287
    )
    
    $
    4,100,000
    
    
    $
    (475,684
    )CDS on ABS:Baa
    
    $
    736
    
    
    $
    (446
    )
    
    $
    3,682
    
    
    $
    (2,880
    )C
    
    
    28,000
    
    
    
    (24,327
    )
    
    
    28,000
    
    
    
    (23,880
    )Total
    
    $
    28,736
    
    
    $
    (24,773
    )
    
    $
    31,682
    
    
    $
    (26,760
    )Credit Swaps Purchased-Single Name:A
    
    $
    (4,120
    )
    
    $
    55
    
    
    $
    (4,120
    )
    
    $
    25Ca
    
    
    
    
    
    
    
    
    
    
    (4,040
    )
    
    
    2,396C
    
    
    (4,040
    )
    
    
    2,406
    
    
    
    
    
    
    
    Total
    
    $
    (8,160
    )
    
    $
    2,461
    
    
    $
    (8,160
    )
    
    $
    2,421
  14




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
 March 31, 2010
    
    
    December 31, 2009Notional
    
    
    Fair
    
    
    Notional
    
    
    FairMoodys Rating Category
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueBy Counterparty Buyer / (Seller)Credit Swaps Sold-Single Name:Aaa
    
    $
    10,000
    
    
    $
    (63
    )
    
    $
    10,000
    
    
    $
    (178
    )Aa
    
    
    9,210,723
    
    
    
    (101,039
    )
    
    
    9,764,609
    
    
    
    (134,586
    )A
    
    
    2,079,972
    
    
    
    (24,832
    )
    
    
    2,301,902
    
    
    
    (26,916
    )Baa
    
    
    65,000
    
    
    
    28
    
    
    
    75,000
    
    
    
    47Non rated
    
    
    1,190,325
    
    
    
    (28,058
    )
    
    
    1,216,408
    
    
    
    (28,042
    )Total
    
    $
    12,556,020
    
    
    $
    (153,964
    )
    
    $
    13,367,919
    
    
    $
    (189,675
    )Credit Swaps Sold-Tranche:Aa
    
    $
    3,350,000
    
    
    $
    (319,953
    )
    
    $
    3,650,000
    
    
    $
    (409,802
    )A
    
    
    450,000
    
    
    
    (66,334
    )
    
    
    450,000
    
    
    
    (65,882
    )Total
    
    $
    3,800,000
    
    
    $
    (386,287
    )
    
    $
    4,100,000
    
    
    $
    (475,684
    )CDS on ABS:Aa
    
    $
    5,000
    
    
    $
    (4,430
    )
    
    $
    5,000
    
    
    $
    (4,357
    )A
    
    
    18,736
    
    
    
    (16,013
    )
    
    
    21,682
    
    
    
    (18,023
    )Non rated
    
    
    5,000
    
    
    
    (4,330
    )
    
    
    5,000
    
    
    
    (4,380
    )Total
    
    $
    28,736
    
    
    $
    (24,773
    )
    
    $
    31,682
    
    
    $
    (26,760
    )Credit Swaps Purchased-Single Name:Aa
    
    $
    (8,160
    )
    
    $
    2,461
    
    
    $
    (8,160
    )
    
    $
    2,421Total
    
    $
    (8,160
    )
    
    $
    2,461
    
    
    $
    (8,160
    )
    
    $
    2,421
  15




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
 March 31, 2010
    
    
    December 31, 2009Notional
    
    
    Fair
    
    
    Notional
    
    
    FairS&P Rating Category
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueBy Single Name Reference Entity/TrancheCredit Swaps Sold-Single Name:AAA
    
    $
    235,530
    
    
    $
    (2,804
    )
    
    $
    347,963
    
    
    $
    (5,765
    )AA
    
    
    1,468,315
    
    
    
    (7,417
    )
    
    
    1,449,137
    
    
    
    (7,442
    )A
    
    
    5,180,910
    
    
    
    (8,703
    )
    
    
    5,656,180
    
    
    
    (11,217
    )BBB
    
    
    4,693,664
    
    
    
    (8,121
    )
    
    
    4,730,878
    
    
    
    (8,438
    )BB
    
    
    567,266
    
    
    
    (13,166
    )
    
    
    598,908
    
    
    
    (16,584
    )B
    
    
    147,265
    
    
    
    (2,058
    )
    
    
    189,284
    
    
    
    (2,726
    )CCC
    
    
    85,000
    
    
    
    (5,705
    )
    
    
    85,000
    
    
    
    (8,864
    )CC
    
    
    132,815
    
    
    
    (88,628
    )
    
    
    213,087
    
    
    
    (106,143
    )D
    
    
    28,500
    
    
    
    (17,401
    )
    
    
    41,000
    
    
    
    (21,868
    )Non rated
    
    
    16,755
    
    
    
    39
    
    
    
    56,482
    
    
    
    (628
    )Total
    
    $
    12,556,020
    
    
    $
    (153,964
    )
    
    $
    13,367,919
    
    
    $
    (189,675
    )Credit Swaps Sold-Tranche:AAA
    
    $
    2,050,000
    
    
    $
    (169,477
    )
    
    $
    1,575,000
    
    
    $
    (120,112
    )AA
    
    
    800,000
    
    
    
    (60,134
    )
    
    
    1,275,000
    
    
    
    (122,406
    )BBB
    
    
    750,000
    
    
    
    (104,784
    )
    
    
    750,000
    
    
    
    (103,601
    )BB
    
    
    150,000
    
    
    
    (21,718
    )
    
    
    100,000
    
    
    
    (12,997
    )B
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    (17,373
    )CCC
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    (45,393
    )CC
    
    
    50,000
    
    
    
    (30,174
    )
    
    
    
    
    
    
    C
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    (53,802
    )Total
    
    $
    3,800,000
    
    
    $
    (386,287
    )
    
    $
    4,100,000
    
    
    $
    (475,684
    )CDS on ABS:BBB
    
    $
    736
    
    
    $
    (446
    )
    
    $
    3,682
    
    
    $
    (2,880
    )B
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    (4,357
    )CCC
    
    
    18,000
    
    
    
    (15,460
    )
    
    
    13,000
    
    
    
    (10,534
    )CC
    
    
    10,000
    
    
    
    (8,867
    )
    
    
    10,000
    
    
    
    (8,989
    )Total
    
    $
    28,736
    
    
    $
    (24,773
    )
    
    $
    31,682
    
    
    $
    (26,760
    )Credit Swaps Purchased-Single Name:A
    
    $
    (4,120
    )
    
    $
    55
    
    
    $
    (4,120
    )
    
    $
    25CC
    
    
    (4,040
    )
    
    
    2,406
    
    
    
    (4,040
    )
    
    
    2,396Total
    
    $
    (8,160
    )
    
    $
    2,461
    
    
    $
    (8,160
    )
    
    $
    2,421
  16




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
 March 31, 2010
    
    
    December 31, 2009Notional
    
    
    Fair
    
    
    Notional
    
    
    FairS&P Rating Category
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueBy Counterparty Buyer / (Seller)Credit Swaps Sold-Single Name:AA
    
    $
    3,070,204
    
    
    $
    (14,735
    )
    
    $
    3,263,322
    
    
    $
    (25,340
    )A
    
    
    8,295,491
    
    
    
    (111,171
    )
    
    
    8,888,189
    
    
    
    (136,293
    )Non rated
    
    
    1,190,325
    
    
    
    (28,058
    )
    
    
    1,216,408
    
    
    
    (28,042
    )Total
    
    $
    12,556,020
    
    
    $
    (153,964
    )
    
    $
    13,367,919
    
    
    $
    (189,675
    )Credit Swaps Sold-Tranche:AA
    
    $
    1,850,000
    
    
    $
    (191,651
    )
    
    $
    1,850,000
    
    
    $
    (199,745
    )A
    
    
    1,500,000
    
    
    
    (128,302
    )
    
    
    1,800,000
    
    
    
    (210,057
    )BBB
    
    
    450,000
    
    
    
    (66,334
    )
    
    
    450,000
    
    
    
    (65,882
    )Total
    
    $
    3,800,000
    
    
    $
    (386,287
    )
    
    $
    4,100,000
    
    
    $
    (475,684
    )CDS on ABS:A
    
    $
    23,736
    
    
    $
    (20,443
    )
    
    $
    26,682
    
    
    $
    (22,380
    )Non rated
    
    
    5,000
    
    
    
    (4,330
    )
    
    
    5,000
    
    
    
    (4,380
    )Total
    
    $
    28,736
    
    
    $
    (24,773
    )
    
    $
    31,682
    
    
    $
    (26,760
    )Credit Swaps Purchased-Single Name:A
    
    $
    (8,160
    )
    
    $
    2,461
    
    
    $
    (8,160
    )
    
    $
    2,421Total
    
    $
    (8,160
    )
    
    $
    2,461
    
    
    $
    (8,160
    )
    
    $
    2,421
  17




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
  March 31, 2010
    
    
    December 31, 2009Notional
    
    
    Fair
    
    
    Notional
    
    
    FairCountry of Domicile
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueCredit Swaps Sold-Single NameBy Reference Entity:North America
    
    $
    6,440,815
    
    
    $
    (126,829
    )
    
    $
    6,836,087
    
    
    $
    (161,513
    )Europe
    
    
    5,513,205
    
    
    
    (24,123
    )
    
    
    5,869,832
    
    
    
    (24,249
    )Asia-Pacific
    
    
    562,000
    
    
    
    (2,997
    )
    
    
    522,000
    
    
    
    (3,714
    )Others
    
    
    40,000
    
    
    
    (15
    )
    
    
    140,000
    
    
    
    (199
    )Total
    
    $
    12,556,020
    
    
    $
    (153,964
    )
    
    $
    13,367,919
    
    
    $
    (189,675
    )By Counterparty:North America
    
    $
    5,943,906
    
    
    $
    (65,220
    )
    
    $
    6,359,144
    
    
    $
    (76,784
    )Europe
    
    
    6,495,114
    
    
    
    (87,978
    )
    
    
    6,891,775
    
    
    
    (111,894
    )Asia-Pacific
    
    
    117,000
    
    
    
    (766
    )
    
    
    117,000
    
    
    
    (997
    )Total
    
    $
    12,556,020
    
    
    $
    (153,964
    )
    
    $
    13,367,919
    
    
    $
    (189,675
    )Credit Swaps Sold -TrancheBy Counterparty:North America
    
    $
    600,000
    
    
    $
    (41,800
    )
    
    $
    600,000
    
    
    $
    (47,099
    )Europe
    
    
    3,200,000
    
    
    
    (344,487
    )
    
    
    3,500,000
    
    
    
    (428,585
    )Total
    
    $
    3,800,000
    
    
    $
    (386,287
    )
    
    $
    4,100,000
    
    
    $
    (475,684
    )CDS on ABSBy Reference Entity:North America
    
    $
    28,736
    
    
    $
    (24,773
    )
    
    $
    31,682
    
    
    $
    (26,760
    )Total
    
    $
    28,736
    
    
    $
    (24,773
    )
    
    $
    31,682
    
    
    $
    (26,760
    )By Counterparty:North America
    
    $
    18,736
    
    
    $
    (16,462
    )
    
    $
    21,682
    
    
    $
    (18,830
    )Europe
    
    
    10,000
    
    
    
    (8,311
    )
    
    
    10,000
    
    
    
    (7,930
    )Total
    
    $
    28,736
    
    
    $
    (24,773
    )
    
    $
    31,682
    
    
    $
    (26,760
    )Credit Swaps Purchased-Single NameBy Reference Entity:North America
    
    $
    (8,160
    )
    
    $
    2,461
    
    
    $
    (8,160
    )
    
    $
    2,421Total
    
    $
    (8,160
    )
    
    $
    2,461
    
    
    $
    (8,160
    )
    
    $
    2,421By Counterparty:Europe
    
    $
    (8,160
    )
    
    $
    2,461
    
    
    $
    (8,160
    )
    
    $
    2,421Total
    
    $
    (8,160
    )
    
    $
    2,461
    
    
    $
    (8,160
    )
    
    $
    2,421
  18




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
  March 31, 2010
    
    
    December 31, 2009Notional
    
    
    Fair
    
    
    Notional
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueCredit Swaps Sold-Single NameYear of Maturity2010
    
    $
    4,869,299
    
    
    $
    (7,371
    )
    
    $
    5,435,860
    
    
    $
    (24,057
    )2011
    
    
    2,449,720
    
    
    
    (87,247
    )
    
    
    2,510,612
    
    
    
    (101,066
    )2012
    
    
    4,250,011
    
    
    
    (64,383
    )
    
    
    4,394,718
    
    
    
    (69,285
    )2013
    
    
    986,990
    
    
    
    5,037
    
    
    
    1,026,729
    
    
    
    4,733Total
    
    $
    12,556,020
    
    
    $
    (153,964
    )
    
    $
    13,367,919
    
    
    $
    (189,675
    )Credit Swaps Sold-TrancheYear of Maturity2012
    
    $
    375,000
    
    
    $
    (12,365
    )
    
    $
    375,000
    
    
    $
    (13,350
    )2013
    
    
    100,000
    
    
    
    (38,182
    )
    
    
    200,000
    
    
    
    (71,175
    )2014
    
    
    3,325,000
    
    
    
    (335,740
    )
    
    
    3,525,000
    
    
    
    (391,159
    )Total
    
    $
    3,800,000
    
    
    $
    (386,287
    )
    
    $
    4,100,000
    
    
    $
    (475,684
    )CDS on ABSEstimated Year of Maturity2010
    
    $
    10,000
    
    
    $
    (8,867
    )
    
    $
    10,000
    
    
    $
    (8,989
    )2011
    
    
    13,000
    
    
    
    (11,579
    )
    
    
    16,682
    
    
    
    (14,199
    )2012
    
    
    5,000
    
    
    
    (3,881
    )
    
    
    5,000
    
    
    
    (3,572
    )2014
    
    
    736
    
    
    
    (446
    )
    
    
    
    
    
    
    Total
    
    $
    28,736
    
    
    $
    (24,773
    )
    
    $
    31,682
    
    
    $
    (26,760
    )Credit Swaps Purchased-Single
NameYear of Maturity2014
    
    $
    (8,160
    )
    
    $
    2,461
    
    
    $
    (8,160
    )
    
    $
    2,421Total
    
    $
    (8,160
    )
    
    $
    2,461
    
    
    $
    (8,160
    )
    
    $
    2,421
  19




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
 5. Variable Interest Entities and CLOs
   CLOs
      20




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
   Consolidation
  Three Months EndedMarch 31, 2010Net CLO RevenueNet realized gains on loans and securities
    
    $
    29,566Net unrealized gains on CLO loans and securities
    
    
    62,077Net realized losses on CLO notes
    
    
    (2,809
    )Net unrealized loss on CLO notes
    
    
    (10,976
    )Other income (loss)
    
    
    (265
    )Total Net CLO revenue
    
    $
    77,593
  21




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
 6. Financial Instruments and Fair Value Disclosures
    
    
    Level 1  Valuations based on unadjusted quoted prices in active markets for identical
assets or liabilities.
 Cash and cash equivalents, which include deposits in banks, money market accounts, money
market funds and CLO cash and cash equivalents, are categorized within Level 1.
 
    
    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.
 Corporate debt securities, interest rate swap and CLO loans and securities are categorized
within Level 2 of the fair value hierarchy. The interest rate swap is included in other assets
in the condensed consolidated statements of financial condition.
 
    
    Level 3  Valuations in which a significant input or inputs are unobservable and that
are supported by little or no market activity.
   22




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
 Fair Value of CLO Assets and Liabilities
    Valuation Techniques
  Valuation Techniques  CLO loans and securities
  Valuation Techniques  CLO notes
 Financial Instruments
 Nonperformance Risk Adjustment -Credit Swap Portfolio
 Fair Value Measurements and Disclosures,
  23




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
  March 31,
    
    
    December 31,2010
    
    
    2009Unrealized loss on credit
swaps, at fair value, without
nonperformance risk
adjustments
    
    $
    716,165
    
    
    $
    906,382Nonperformance risk adjustments
    
    
    (151,729
    )
    
    
    (214,477
    )Unrealized loss on credit
swaps, at fair value, after
nonperformance risk
adjustments
    
    $
    564,436
    
    
    $
    691,905
  Three Months EndedMarch 31,2010
    
    
    2009Net credit swap revenue
without nonperformance risk
adjustments
    
    $
    150,284
    
    
    $
    193,315Nonperformance risk adjustments
    
    
    62,754
    
    
    
    82,434Net credit swap revenue after
nonperformance risk
adjustments
    
    $
    87,530
    
    
    $
    110,881
 Fair Value Hierarchy Tables
  Quoted Pricesin
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significant
    
    
    Assets /for
    
    
    Observable
    
    
    Unobservable
    
    
    LiabilitiesIdentical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    at Fair(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    ValueAssetsCash and cash equivalents
    
    $
    146,961
    
    
    $
    
    
    
    $
    
    
    
    $
    146,961Investments
    
    
    
    
    
    
    352,048
    
    
    
    1,152
    
    
    
    353,200CLO cash and cash equivalents
    
    
    138,606
    
    
    
    
    
    
    
    
    
    
    
    138,606CLO loans and securities
    
    
    
    
    
    
    2,488,530
    
    
    
    
    
    
    
    2,488,530Unrealized gain on credit swaps
    
    
    
    
    
    
    
    
    
    
    1,873
    
    
    
    1,873Other assets
    
    
    
    
    
    
    3,223
    
    
    
    
    
    
    
    3,223Total Assets
    
    $
    285,567
    
    
    $
    2,843,801
    
    
    $
    3,025
    
    
    $
    3,132,393LiabilitiesUnrealized loss on credit swaps
    
    $
    
    
    
    $
    
    
    
    $
    564,436
    
    
    $
    564,436Other liabilities
    
    
    
    
    
    
    
    
    
    
    6,812
    
    
    
    6,812CLO notes
    
    
    
    
    
    
    
    
    
    
    2,208,804
    
    
    
    2,208,804Total Liabilities
    
    $
    
    
    
    $
    
    
    
    $
    2,780,052
    
    
    $
    2,780,052
  24




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
  Quoted Pricesin
    
    
    Significant
    
    
    
    
    
    
    TotalActive Markets
    
    
    Other
    
    
    Significant
    
    
    Assets /for
    
    
    Observable
    
    
    Unobservable
    
    
    LiabilitiesIdentical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    at Fair(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    ValueAssetsCash and cash equivalents
    
    $
    299,514
    
    
    $
    
    
    
    $
    
    
    
    $
    299,514Investments
    
    
    
    
    
    
    272,931
    
    
    
    1,344
    
    
    
    274,275Unrealized gain on credit swaps
    
    
    
    
    
    
    
    
    
    
    2,207
    
    
    
    2,207Other assets
    
    
    
    
    
    
    1,837
    
    
    
    
    
    
    
    1,837Total Assets
    
    $
    299,514
    
    
    $
    274,768
    
    
    $
    3,551
    
    
    $
    577,833LiabilitiesUnrealized loss on credit swaps
    
    $
    
    
    
    $
    
    
    
    $
    691,905
    
    
    $
    691,905Other liabilities
    
    
    
    
    
    
    
    
    
    
    5,470
    
    
    
    5,470Total Liabilities
    
    $
    
    
    
    $
    
    
    
    $
    697,375
    
    
    $
    697,375
 Level 3 Assets and Liabilities Reconciliation Tables
  Three Months Ended
    
    
    Three Months EndedMarch 31, 2010
    
    
    March 31, 2009Unrealized
    
    
    
    
    
    
    Trading
    
    
    Available-for-Gain on
    
    
    
    
    
    
    Account
    
    
    SaleCredit Swaps
    
    
    Investments
    
    
    Assets
    
    
    InvestmentsBalance, beginning of period
    
    $
    2,207
    
    
    $
    1,344
    
    
    $
    3,940
    
    
    $
    796Realized losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (614
    )Unrealized gains (losses)
    
    
    (334
    )
    
    
    (54
    )
    
    
    (110
    )
    
    
    171Purchases, sales, issuances
and settlements
    
    
    
    
    
    
    (138
    )
    
    
    
    
    
    
    12Balance, end of period
    
    $
    1,873
    
    
    $
    1,152
    
    
    $
    3,830
    
    
    $
    365
  25




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
   Three Months Ended
    
    
    Three Months EndedMarch 31, 2010
    
    
    March 31, 2009Unrealized
    
    
    UnrealizedOther
    
    
    Loss on Credit
    
    
    Loss on CreditCLO Notes
    
    
    Liabilities
    
    
    Swaps
    
    
    SwapsBalance, beginning of period
    
    $
    
    
    
    $
    (5,470
    )
    
    $
    (691,905
    )
    
    $
    (2,173,461
    )Adoption of ASC Topic 810,
Consolidation
    
    
    (2,210,642
    )
    
    
    
    
    
    
    
    
    
    
    Realized losses
    
    
    (2,809
    )
    
    
    
    
    
    
    56,042
    
    
    
    34,478Unrealized gains (losses)
    
    
    (10,976
    )
    
    
    (1,342
    )
    
    
    71,427
    
    
    
    88,412Purchases, sales, issuances
and settlements
    
    
    15,623
    
    
    
    
    
    
    
    
    
    
    
    Balance, end of period
    
    $
    (2,208,804
    )
    
    $
    (6,812
    )
    
    $
    (564,436
    )
    
    $
    (2,050,571
    )
   26




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
 Financial Instruments Not Carried at Fair Value
   Fair Value Option
 Financial Instruments, Financial Instruments, Financial Instruments,
  7. Primus Absolute Return Credit Fund and Primus Credit Strategies Fund
   27




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
 8. Earnings per Share
  Three Months EndedMarch 31,2010
    
    
    2009Net earnings available to common shares
    
    $
    86,522
    
    
    $
    106,808Weighted-average basic shares
outstanding
    
    
    38,686
    
    
    
    40,861Effect of dilutive instrumentsRestricted share units
    
    
    1,594
    
    
    
    27Diluted shares
    
    
    40,280
    
    
    
    40,888Basic EPS
    
    $
    2.24
    
    
    $
    2.61Diluted EPS
    
    $
    2.15
    
    
    $
    2.61
  9. Share Based Compensation
      28




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
 10. Comprehensive Income
  Three Months EndedMarch 31,2010
    
    
    2009Net income
    
    $
    176,923
    
    
    $
    107,752Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    (38
    )
    
    
    (75
    )Change in net unrealized gains (losses) on
available-for-sale investments
    
    
    1,382
    
    
    
    (2,397
    )Comprehensive income:
    
    
    178,267
    
    
    
    105,280Less: Distributions on preferred securities of subsidiary
    
    
    988
    
    
    
    944Less: Net income attributable to non-parent interests
    
    
    89,413
    
    
    
    Comprehensive income available to common shares
    
    $
    87,866
    
    
    $
    104,336
 11. Income Taxes
  12. Subsequent Event
  13. Segment Reporting
 Consolidation Consolidation
  29




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
 Three Months Ended March 31, 2010CreditProtection,AssetManagementand
    
    
    CLOs
    
    
    
    
    
    
    ConsolidatedCorporate
    
    
    Standalone
    
    
    Eliminations
    
    
    TotalsRevenues:Net credit swap revenue
    
    $
    87,530
    
    
    $
    
    
    
    $
    
    
    
    $
    87,530Net CLO revenue
    
    
    
    
    
    
    74,426
    
    
    
    3,167
    
    
    
    77,593CLO Interest income
    
    
    
    
    
    
    23,422
    
    
    
    
    
    
    
    23,422Asset management and advisory fees
    
    
    1,899
    
    
    
    
    
    
    
    (1,608
    )
    
    
    291Interest income
    
    
    2,700
    
    
    
    
    
    
    
    
    
    
    
    2,700Gain on retirement of long-term debt
    
    
    4,757
    
    
    
    
    
    
    
    
    
    
    
    4,757Other income
    
    
    3,236
    
    
    
    
    
    
    
    (3,167
    )
    
    
    69Total revenues
    
    $
    100,122
    
    
    $
    97,848
    
    
    $
    (1,608
    )
    
    $
    196,362Expenses:CLO interest expense
    
    $
    
    
    
    $
    5,837
    
    
    $
    
    
    
    $
    5,837CLO expenses
    
    
    
    
    
    
    2,598
    
    
    
    (1,608
    )
    
    
    990Compensation and employee benefits
    
    
    5,425
    
    
    
    
    
    
    
    
    
    
    
    5,425Professional and legal fees
    
    
    1,639
    
    
    
    
    
    
    
    
    
    
    
    1,639Interest expense
    
    
    1,869
    
    
    
    
    
    
    
    
    
    
    
    1,869Other expenses
    
    
    3,536
    
    
    
    
    
    
    
    
    
    
    
    3,536Total expenses
    
    $
    12,469
    
    
    $
    8,435
    
    
    $
    (1,608
    )
    
    $
    19,296Income before provision for income taxes
    
    $
    87,653
    
    
    $
    89,413
    
    
    $
    
    
    
    $
    177,066Provision for income tax
    
    
    143
    
    
    
    
    
    
    
    
    
    
    
    143Net income
    
    $
    87,510
    
    
    $
    89,413
    
    
    $
    
    
    
    $
    176,923Less: Distributions on preferred securities
of subsidiary
    
    
    988
    
    
    
    
    
    
    
    
    
    
    
    988Less: Net income attributable to non-parent
interests in CLOs
    
    $
    
    
    
    $
    89,413
    
    
    $
    
    
    
    $
    89,413Net income available to common shares
    
    $
    86,522
    
    
    $
    
    
    
    $
    
    
    
    $
    86,522Segment assets
    
    $
    657,756
    
    
    $
    2,655,652
    
    
    $
    
    
    
    $
    3,313,408
  30




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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 the condensed consolidated
financial statements, including the notes thereto, included elsewhere in this Quarterly Report and
our consolidated financial statements and accompanying notes which appear in the Companys 2009
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 2009 Annual Report on Form 10-K , particularly under Item 1A Risk Factors and the
heading Cautionary Note Regarding Forward-Looking Statements. In this discussion, the terms
Primus Guaranty and we, us, our, and similar terms refer to Primus Guaranty, Ltd. and its
wholly owned subsidiaries; the terms the Company refers to Primus Guaranty and the CLOs required
to be consolidated as a result of the adoption of ASC Topic 810, Consolidation; and other
capitalized items used but not defined are as defined elsewhere in this Quarterly Report.
 Business
  Consolidation
 Primus Asset Management
  Primus Financial
   31




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Executive Overview and Business Outlook
      32




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##### Table of Contents



Critical Accounting Policies
   33




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##### Table of Contents



Consolidation,
 Impact of Adoption of ASC Topic 810, Consolidation
 Consolidation
    34




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##### Table of Contents



Nonperformance Risk Adjustment
 Fair Value Measurements and Disclosures,
 Fair Value Hierarchy  Level 3 Assets and Liabilities
   Counterparty Default  Lehman Brothers Special Financing Inc.
    35




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##### Table of Contents



Results of Operations
 Introduction
 Consolidation Consolidation
    Three Months Ended March 31, 2010 Compared With Three Months Ended March 31, 2009
 Overview of Financial Results
     36




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##### Table of Contents



Net Credit Swap Revenue
   
    
    Net premiums earned;
 
    
    Net realized gains (losses) on credit swaps, which include gain (losses) on terminated
credit swaps sold and losses on credit events during the period; and
 
    
    Net unrealized gains (losses) on credit swaps.
  Three Months EndedMarch 31,2010
    
    
    2009Net premiums earned
    
    $
    16,436
    
    
    $
    22,469Net realized losses on credit swaps
    
    
    (56,042
    )
    
    
    (34,478
    )Net unrealized gains on credit swaps
    
    
    127,136
    
    
    
    122,890Total net credit swap revenue
    
    $
    87,530
    
    
    $
    110,881
 Net Premiums Earned
   37




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##### Table of Contents



Net Realized Losses on Credit Swaps
  Net Unrealized Gains on Credit Swaps
  Net CLO Revenue
   38




---



##### Table of Contents



CLO Interest Income
  Asset Management and Advisory Fees
    Interest Income
   Gain on Retirement of Long-Term Debt
     39




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##### Table of Contents



Impairment Loss on Investments
  Other Income (Loss)
   Operating Expenses
  Three Months EndedMarch 31,2010
    
    
    2009CLO expenses
    
    $
    990
    
    
    $
    Compensation and employee benefits
    
    
    5,425
    
    
    
    4,715Professional and legal fees
    
    
    1,639
    
    
    
    1,421Other
    
    
    3,536
    
    
    
    1,959Total operating expenses
    
    $
    11,590
    
    
    $
    8,095Number of full-time employees, at end of period
    
    
    49
    
    
    
    39
    40




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##### Table of Contents



CLO Interest Expense
  Interest Expense and Preferred Distributions
 Interest Expense
      41




---



##### Table of Contents



Preferred Distributions
  Provision for Income Taxes
  Income Taxes
   42




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##### Table of Contents



Non-GAAP Financial Measures  Economic Results
  Consolidation,
  
    
    Unrealized gains (losses) on credit swaps sold by Primus Financial are excluded from
GAAP net income (loss) available to common shares;
 
    
    Realized gains from early termination of credit swaps sold by Primus Financial are
excluded from GAAP net income (loss) available to common shares;
 
    
    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) available to common shares;
 
    
    Provision for CDS on ABS credit events; and
 
    
    Reduction in provision for CDS on ABS credit events upon termination of credit swaps.
   43




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##### Table of Contents



Three Months EndedMarch 31,2010
    
    
    2009GAAP net income available to common shares
    
    $
    86,522
    
    
    $
    106,808Adjustments:Less: Change in unrealized fair value of credit
swaps sold (gain) loss by Primus Financial
    
    
    (127,136
    )
    
    
    (122,890
    )Less: Realized gains from early termination of
credit swaps sold by Primus Financial
    
    
    
    
    
    
    Add: Amortization of realized gains from the
early termination of credit swap sold by Primus
Financial
    
    
    294
    
    
    
    393Less: Provision for CDS on ABS credit events
    
    
    (2,374
    )
    
    
    (15,054
    )Add: Reduction in provision for CDS on ABS
credit events upon termination of credit swaps
    
    
    1,819
    
    
    
    24,628Net Economic Results
    
    $
    (40,875
    )
    
    $
    (6,115
    )Economic Results earnings per GAAP diluted share
    
    $
    (1.01
    )
    
    $
    (0.15
    )Economic Results weighted average common shares
outstanding  GAAP diluted
    
    
    40,280
    
    
    
    40,888
  Off-Balance Sheet Arrangements
   44




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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
    
    $
    9,248
    
    
    $
    1,832
    
    
    $
    3,370
    
    
    $
    2,312
    
    
    $
    1,7347% Senior Notes
    
    
    94,541
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94,541Interest on 7% Senior Notes (a)
    
    
    169,475
    
    
    
    2,317
    
    
    
    10,057
    
    
    
    13,236
    
    
    
    143,865Subordinated deferrable interest notes
    
    
    136,100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    136,100Interest on subordinated deferrable
interest notes (b)
    
    
    69,722
    
    
    
    4,681
    
    
    
    9,374
    
    
    
    9,361
    
    
    
    46,306Total
    
    $
    479,086
    
    
    $
    8,830
    
    
    $
    22,801
    
    
    $
    24,909
    
    
    $
    422,546
 (a)
    
    Net interest payments on the outstanding 7% Senior Notes at March 31, 2010 are adjusted by the
interest rate swap agreement, which converts a portion of the interest payment on the 7% Senior
Notes from a fixed to a floating basis, as previously discussed. Future payments of interest on the
interest rate swap will be determined by future LIBOR rates, to which a predetermined contractual
rate is added. For the purpose of this table, estimated future LIBOR rates were based on the last
rate set during the first quarter of 2010. The counterparty has the right to terminate the interest
rate swap agreement in 2011, and for the purpose of this table, the interest rate swap is assumed
to be terminated at that date.(b)
    
    Future payments for interest on our subordinated deferrable interest notes will be determined
by future LIBOR rates, to which a predetermined contractual spread is added, as previously
discussed. For the purpose of this table, estimated future LIBOR rates were based on the last rate
set during the first quarter of 2010. Property leases:
  CLOs:
   45




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##### Table of Contents



Liquidity and Capital Resources
          46




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##### Table of Contents



Cash Flows
 Cash flows from operating activities 
 Cash flows from investing activities 
 Cash flows from financing activities 
   47




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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 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, including changes in accounting principles;
    
    technological developments;
    
    changes in tax laws;
    
    changes in international or national political or economic conditions,
including any terrorist attacks;
    
    successful implementation of our 2010 Business Outlook and our ability
to effectively integrate the CypressTree acquisition and manage its
CLOs and other products;
    
    the effects of implementation of new or revised accounting pronouncements; and
    
    uncertainties that have not been identified at this time.
  48




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##### Table of Contents



Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
     49




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##### Table of Contents



Item 4.
    
    Controls and Procedures
   
 Part II. Other Information
 
 Item 1.
    
    Legal Proceedings
  
 Item 1A.
    
    Risk Factors
   50




---



##### Table of Contents



Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
 Issuer Purchases of Equity Securities
  Total Number of
    
    
    Approximate DollarTotal
    
    
    
    
    
    
    Shares Purchased
    
    
    Value of Shares thatNumber of
    
    
    Average
    
    
    as Part of Publicly
    
    
    May Yet Be PurchasedShares
    
    
    Price Paid
    
    
    Announced Plans
    
    
    under the Plans orPeriod
    
    Purchased
    
    
    per Share
    
    
    or Programs
    
    
    Programs (a)January 1  31
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    11,933,400February 1  28(b)
    
    
    50,118
    
    
    $
    3.63
    
    
    
    50,118
    
    
    $
    26,751,472March 1  31
    
    
    80,746
    
    
    $
    4.17
    
    
    
    80,746
    
    
    $
    26,414,761Total
    
    
    130,864
    
    
    $
    3.96
    
    
    
    130,864
 (a)
    
    On October 8, 2008, our board of directors authorized the implementation of a buyback
program for the purchase of our common shares and/or the 7% Senior Notes in the aggregate up to
$25.0 million. The amounts in this column do not reflect the cost of approximately $11.5 million
for purchases of our 7% Senior Notes, since inception of our buyback program through the quarter
ended March 31, 2010.(b)
    
    On February 3, 2010, our board of directors authorized an additional expenditure of up to
$15 million of available cash for the purchase of our common shares and/or our 7% Senior Notes. 
 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
  51




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SIGNATURES
  PRIMUS GUARANTY, LTD./s/ Thomas W. JasperThomas W. JasperChief Executive Officer/s/ Richard ClaidenRichard ClaidenChief Financial Officer(Duly Authorized Officer and Principal Financial Officer)   52