|  |
|--|
|  |
|  |
|  |
|  |

UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.20549

|  |
|--|
|  |  |  |  |
|  |

FORM 10-Q

(MarkOne)

    QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterlyperiod ended September  30,2006

or

    TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Forthe transition period from                         to                        .

CommissionFile Number: 001-32307

|  |
|--|
|  |  |  |  |
|  |

PrimusGuaranty, Ltd.

(Exact name of registrant asspecified in itscharter)

|                                                              |  |  |                                     |
|--------------------------------------------------------------|--|--|-------------------------------------|
| Bermuda                                                      |  |  | NotRequired                         |
| (State or other jurisdictionofincorporation or organization) |  |  | (I.R.S. EmployerIdentification No.) |
|                                                              |

Clarendon House2 ChurchStreetHamilton HM 11, Bermuda

(Addressof principal executive offices, including zipcode)

441-296-0519

(Registrant’stelephone number, including areacode)

|  |
|--|
|  |  |  |  |
|  |

Indicate by checkmark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period thatthe registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.    Yes    No 

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of ‘‘acceleratedfiler and large accelerated filer’’ in Rule 12b-2 of theExchange Act). (Check one):

Large acceleratedfiler                 Accelerated filer                Non-accelerated filer 

Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act).    Yes    No 

As of November 1, 2006, thenumber of shares outstanding of the issuer's common stock, $0.08par value, was43,356,274.

|  |
|--|
|  |
|  |
|  |
|  |

----

Primus Guaranty,Ltd.Form 10-QFor the three months ended September30,  2006

INDEX

|            |  |  |                                                                                                                             |  |    |        |  |        |        |
|------------|--|--|-----------------------------------------------------------------------------------------------------------------------------|--|----|--------|--|--------|--------|
| PartI.     |  |  | FinancialInformation                                                                                                        |  |    |        |  |   |   |
| Item1.     |  |  | FinancialStatements                                                                                                         |  |    |        |  |   |   |
|       |  |  | Condensed ConsolidatedStatements of Financial Condition as ofSeptember  30,2006 (Unaudited) and December  31,  2005         |  |    |        |  | 3      |   |
|       |  |  | Condensed ConsolidatedStatements of Operations (Unaudited) for the Three and nine monthsended September  30,  2006 and 2005 |  |    |        |  | 4      |   |
|       |  |  | Condensed Consolidated Statements of Cash Flows(Unaudited) for the Nine months ended September  30,2006 and 2005            |  |    |        |  | 5      |   |
|       |  |  | Notes to CondensedConsolidated Financial Statements                                                                         |  |    |        |  | 6      |   |
| Item2.     |  |  | Management’s Discussion and Analysis ofFinancial Condition and Results of Operations                                  |  |    |        |  | 19     |   |
|       |  |  | Cautionary Statement Regarding Forward LookingInformation                                                                   |  |    |        |  | 38     |   |
| Item3.     |  |  | Quantitative and Qualitative Disclosures about MarketRisk                                                                   |  |    |        |  | 40     |   |
| Item4.     |  |  | Controls and Procedures                                                                                                     |  |    |        |  | 40     |   |
| Part II.   |  |  | OtherInformation                                                                                                            |  |    |        |  |   |   |
| Item1.     |  |  | Legal Proceedings                                                                                                           |  |    |        |  | 41     |   |
| Item 1A.   |  |  | Risk Factors                                                                                                                |  |    |        |  | 41     |   |
| Item 2.    |  |  | Unregistered Sales of EquitySecurities and Use of Proceeds                                                                  |  |    |        |  | 41     |   |
| Item 3.    |  |  | Defaults upon SeniorSecurities                                                                                              |  |    |        |  | 41     |   |
| Item4.     |  |  | Submission of Matters to a Vote of SecurityHolders                                                                          |  |    |        |  | 41     |   |
| Item 5.    |  |  | OtherInformation                                                                                                            |  |    |        |  | 41     |   |
| Item6.     |  |  | Exhibits                                                                                                                    |  |    |        |  | 41     |   |
| Signatures |  |  |                                                                                                                             |  | 42 |   |
|            |

2

----

Table of Contents

PartI.    Financial Information

|              |                      |
|--------------|----------------------|
| Item1.  | Financial Statements |

Primus Guaranty,Ltd.Condensed Consolidated Statements of FinancialCondition(in thousands except per shareamounts)

|                                                                                                                                                                 |  |  |                   |   |         |                  |  |  |  |   |         |         |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|-------------------|---|---------|------------------|--|--|--|---|---------|---------|
|                                                                                                                                                            |  |  | September30, 2006 |   |         | December 31,2005 |
|                                                                                                                                                            |  |  | (unaudited)       |   |         |             |
| Assets                                                                                                                                                          |  |  |                   |   |    |             |  |  |  |   |    |    |
| Cashand cashequivalents                                                                                                                                         |  |  |                   | $ | 58,701  |             |  |  |  | $ | 69,355  |    |
| Available-for-saleinvestments                                                                                                                                   |  |  |                   |   | 599,932 |             |  |  |  |   | 560,147 |    |
| Tradinginvestments                                                                                                                                              |  |  |                   |   | 1,257   |             |  |  |  |   | — |    |
| Accruedinterestreceivable                                                                                                                                       |  |  |                   |   | 5,900   |             |  |  |  |   | 5,127   |    |
| Accruedpremiums and interest receivable on credit and otherswaps                                                                                                |  |  |                   |   | 3,813   |             |  |  |  |   | 3,461   |    |
| Premiumsreceivable on financialguarantees                                                                                                                       |  |  |                   |   | 100     |             |  |  |  |   | 300     |    |
| Unrealized gainon credit and other swaps, at fairvalue                                                                                                          |  |  |                   |   | 59,930  |             |  |  |  |   | 25,342  |    |
| Deposit andwarehouse loanagreements                                                                                                                             |  |  |                   |   | 4,116   |             |  |  |  |   | — |    |
| Fixedassets and software costs,net                                                                                                                              |  |  |                   |   | 5,753   |             |  |  |  |   | 4,993   |    |
| Debt issuance costs,net                                                                                                                                         |  |  |                   |   | 3,032   |             |  |  |  |   | 3,147   |    |
| Otherassets                                                                                                                                                     |  |  |                   |   | 1,597   |             |  |  |  |   | 1,210   |    |
| Totalassets                                                                                                                                                     |  |  |                   | $ | 744,131 |             |  |  |  | $ | 673,082 |    |
| Liabilitiesand stockholders’equity                                                                                                                        |  |  |                   |   |    |             |  |  |  |   |    |    |
| Accounts payable andaccruedexpenses                                                                                                                             |  |  |                   | $ | 2,236   |             |  |  |  | $ | 3,035   |    |
| Accruedcompensation                                                                                                                                             |  |  |                   |   | 5,974   |             |  |  |  |   | 4,833   |    |
| Interestpayable                                                                                                                                                 |  |  |                   |   | 339     |             |  |  |  |   | 404     |    |
| Accrued premiums oncredit and otherswaps                                                                                                                        |  |  |                   |   | 42      |             |  |  |  |   | — |    |
| Taxespayable                                                                                                                                                    |  |  |                   |   | 19      |             |  |  |  |   | 54      |    |
| Unrealized loss oncredit and other swaps, at fairvalue                                                                                                          |  |  |                   |   | 1,350   |             |  |  |  |   | 3,521   |    |
| Deferred creditswap premiums                                                                                                                                    |  |  |                   |   | 29      |             |  |  |  |   | 46      |    |
| Deferredfinancial guaranteepremiums                                                                                                                             |  |  |                   |   | 100     |             |  |  |  |   | 401     |    |
| Deferred rentpayable                                                                                                                                            |  |  |                   |   | 586     |             |  |  |  |   | 416     |    |
| Long-termdebt                                                                                                                                                   |  |  |                   |   | 200,000 |             |  |  |  |   | 200,000 |    |
| Totalliabilities                                                                                                                                                |  |  |                   |   | 210,675 |             |  |  |  |   | 212,710 |    |
| Preferredsecurities ofsubsidiary                                                                                                                                |  |  |                   |   | 98,521  |             |  |  |  |   | 98,521  |    |
| Stockholders’equity:                                                                                                                                      |  |  |                   |   |    |             |  |  |  |   |    |    |
| Common stock, $0.08par value, 62,500,000 shares authorized, 43,341,973 and 43,176,511shares issued and outstanding at September  30,  2006 andDecember  31,2005 |  |  |                   |   | 3,572   |             |  |  |  |   | 3,572   |    |
| Additionalpaid-in-capital                                                                                                                                       |  |  |                   |   | 268,365 |             |  |  |  |   | 265,848 |    |
| Warrants                                                                                                                                                        |  |  |                   |   | 612     |             |  |  |  |   | 612     |    |
| Accumulatedother comprehensiveloss                                                                                                                              |  |  |                   |   | (3,182  | )           |  |  |  |   | (4,254  | )  |
| Retainedearnings                                                                                                                                                |  |  |                   |   | 165,568 |             |  |  |  |   | 96,073  |    |
| Totalstockholders’equity                                                                                                                                  |  |  |                   |   | 434,935 |             |  |  |  |   | 361,851 |    |
| Totalliabilities, preferred securities of subsidiary andstockholders’equity                                                                               |  |  |                   | $ | 744,131 |             |  |  |  | $ | 673,082 |    |
|                                                                                                                                                                 |

Seeaccompanying notes.

3

----

Table of Contents

Primus Guaranty, Ltd.CondensedConsolidated Statements of Operations(in thousands except pershareamounts)

|                                                   |  |  |                                 |   |         |                               |  |  |      |   |         |         |  |  |  |   |         |         |  |  |  |   |         |         |
|---------------------------------------------------|--|--|---------------------------------|---|---------|-------------------------------|--|--|------|---|---------|---------|--|--|--|---|---------|---------|--|--|--|---|---------|---------|
|                                              |  |  | ThreeMonths Ended September 30, |   |         | Nine Months EndedSeptember30, |
|                                              |  |  | 2006                            |   |         | 2005                          |  |  | 2006 |   |         | 2005    |
|                                              |  |  | (unaudited)                     |   |         | (unaudited)                   |
| Revenues                                          |  |  |                                 |   |    |                          |  |  |      |   |    |    |  |  |  |   |    |    |  |  |  |   |    |    |
| Netcredit swaprevenue                             |  |  |                                 | $ | 28,905  |                          |  |  |      | $ | 27,449  |    |  |  |  | $ | 85,865  |    |  |  |  | $ | 15,672  |    |
| Nettotal return swaprevenue                       |  |  |                                 |   | 313     |                          |  |  |      |   | — |    |  |  |  |   | 437     |    |  |  |  |   | — |    |
| Netwarehouse loanrevenue                          |  |  |                                 |   | 76      |                          |  |  |      |   | — |    |  |  |  |   | 76      |    |  |  |  |   | — |    |
| Premiumsearned on financialguarantees             |  |  |                                 |   | 100     |                          |  |  |      |   | 101     |    |  |  |  |   | 300     |    |  |  |  |   | 300     |    |
| Assetmanagement and advisoryfees                  |  |  |                                 |   | 542     |                          |  |  |      |   | 49      |    |  |  |  |   | 709     |    |  |  |  |   | 140     |    |
| Interestincome                                    |  |  |                                 |   | 7,143   |                          |  |  |      |   | 4,483   |    |  |  |  |   | 20,530  |    |  |  |  |   | 10,969  |    |
| Investmentportfolio realized gains(losses)        |  |  |                                 |   | — |                          |  |  |      |   | (3      | )  |  |  |  |   | — |    |  |  |  |   | 20      |    |
| Foreigncurrency revaluation gain(loss)            |  |  |                                 |   | (32     | )                        |  |  |      |   | 55      |    |  |  |  |   | (56     | )  |  |  |  |   | (1,464  | )  |
| Totalnetrevenues                                  |  |  |                                 |   | 37,047  |                          |  |  |      |   | 32,134  |    |  |  |  |   | 107,861 |    |  |  |  |   | 25,637  |    |
| Expenses                                          |  |  |                                 |   |    |                          |  |  |      |   |    |    |  |  |  |   |    |    |  |  |  |   |    |    |
| Compensationand employeebenefits                  |  |  |                                 |   | 5,023   |                          |  |  |      |   | 3,537   |    |  |  |  |   | 15,517  |    |  |  |  |   | 12,139  |    |
| Professionaland legalfees                         |  |  |                                 |   | 1,361   |                          |  |  |      |   | 981     |    |  |  |  |   | 3,645   |    |  |  |  |   | 2,731   |    |
| Depreciationandamortization                       |  |  |                                 |   | 649     |                          |  |  |      |   | 533     |    |  |  |  |   | 1,846   |    |  |  |  |   | 1,574   |    |
| Technologyanddata                                 |  |  |                                 |   | 726     |                          |  |  |      |   | 535     |    |  |  |  |   | 1,546   |    |  |  |  |   | 1,250   |    |
| Interestexpense                                   |  |  |                                 |   | 2,831   |                          |  |  |      |   | 649     |    |  |  |  |   | 7,933   |    |  |  |  |   | 1,640   |    |
| Other                                             |  |  |                                 |   | 1,302   |                          |  |  |      |   | 805     |    |  |  |  |   | 3,632   |    |  |  |  |   | 2,423   |    |
| Totalexpenses                                     |  |  |                                 |   | 11,892  |                          |  |  |      |   | 7,040   |    |  |  |  |   | 34,119  |    |  |  |  |   | 21,757  |    |
| Distributionson preferred securities ofsubsidiary |  |  |                                 |   | (1,437  | )                        |  |  |      |   | (1,022  | )  |  |  |  |   | (4,206  | )  |  |  |  |   | (2,797  | )  |
| Incomebefore provision for incometaxes            |  |  |                                 |   | 23,718  |                          |  |  |      |   | 24,072  |    |  |  |  |   | 69,536  |    |  |  |  |   | 1,083   |    |
| (Provision)benefit for incometaxes                |  |  |                                 |   | 14      |                          |  |  |      |   | (63     | )  |  |  |  |   | (41     | )  |  |  |  |   | (108    | )  |
| Netincome available to commonshares               |  |  |                                 | $ | 23,732  |                          |  |  |      | $ | 24,009  |    |  |  |  | $ | 69,495  |    |  |  |  | $ | 975     |    |
| Incomeper commonshare:                            |  |  |                                 |   |    |                          |  |  |      |   |    |    |  |  |  |   |    |    |  |  |  |   |    |    |
| Basic                                             |  |  |                                 | $ | 0.55    |                          |  |  |      | $ | 0.56    |    |  |  |  | $ | 1.61    |    |  |  |  | $ | 0.02    |    |
| Diluted                                           |  |  |                                 | $ | 0.54    |                          |  |  |      | $ | 0.54    |    |  |  |  | $ | 1.56    |    |  |  |  | $ | 0.02    |    |
| Averagecommon sharesoutstanding:                  |  |  |                                 |   |    |                          |  |  |      |   |    |    |  |  |  |   |    |    |  |  |  |   |    |    |
| Basic                                             |  |  |                                 |   | 43,314  |                          |  |  |      |   | 43,120  |    |  |  |  |   | 43,285  |    |  |  |  |   | 43,147  |    |
| Diluted                                           |  |  |                                 |   | 44,341  |                          |  |  |      |   | 44,543  |    |  |  |  |   | 44,410  |    |  |  |  |   | 44,673  |    |
|                                                   |

Seeaccompanying notes.

4

----

Table of Contents

Primus Guaranty, Ltd.CondensedConsolidated Statements of Cash Flows(in thousands except pershareamounts)

|                                                                                 |  |  |                               |   |          |         |  |  |  |   |          |         |
|---------------------------------------------------------------------------------|--|--|-------------------------------|---|----------|---------|--|--|--|---|----------|---------|
|                                                                            |  |  | Ninemonths ended September30, |
|                                                                            |  |  | 2006                          |   |          | 2005    |
|                                                                            |  |  | (unaudited)                   |
| Cashflows from operatingactivities                                              |  |  |                               |   |     |    |  |  |  |   |     |    |
| Netincome                                                                       |  |  |                               | $ | 69,495   |    |  |  |  | $ | 975      |    |
| Adjustmentsto reconcile net income to net cash provided by operatingactivities: |  |  |                               |   |     |    |  |  |  |   |     |    |
| Non-cashitems included in netincome:                                            |  |  |                               |   |     |    |  |  |  |   |     |    |
| Depreciation andamortization                                                    |  |  |                               |   | 1,846    |    |  |  |  |   | 1,574    |    |
| Stockcompensation                                                               |  |  |                               |   | 2,747    |    |  |  |  |   | 2,149    |    |
| Netunrealized (gain) loss on swapportfolio                                      |  |  |                               |   | (36,759  | )  |  |  |  |   | 18,837   |    |
| Netamortization of premium and discount onsecurities                            |  |  |                               |   | (2,669   | )  |  |  |  |   | —  |    |
| Deferredrent                                                                    |  |  |                               |   | 170      |    |  |  |  |   | (20      | )  |
| Loss ondisposal ofassets                                                        |  |  |                               |   | 25       |    |  |  |  |   | —  |    |
| Amortizationof debt issuancecosts                                               |  |  |                               |   | 128      |    |  |  |  |   | 31       |    |
| Distributions onpreferred securities ofsubsidiary                               |  |  |                               |   | 4,206    |    |  |  |  |   | 2,798    |    |
| Increase(decrease) in cash resulting from changesin:                            |  |  |                               |   |     |    |  |  |  |   |     |    |
| Accrued interestreceivable                                                      |  |  |                               |   | (773     | )  |  |  |  |   | (2,754   | )  |
| Accruedpremiums and interest receivable on credit and otherswaps                |  |  |                               |   | (352     | )  |  |  |  |   | 188      |    |
| Premiumsreceivable on financialguarantees                                       |  |  |                               |   | 200      |    |  |  |  |   | 400      |    |
| Depositand warehouse loanagreement                                              |  |  |                               |   | (4,116   | )  |  |  |  |   | —  |    |
| Otherassets                                                                     |  |  |                               |   | (387     | )  |  |  |  |   | 356      |    |
| Purchase oftradinginvestments                                                   |  |  |                               |   | (1,257   | )  |  |  |  |   | —  |    |
| Accountspayable and accruedexpenses                                             |  |  |                               |   | (799     | )  |  |  |  |   | 881      |    |
| Accruedcompensation                                                             |  |  |                               |   | 1,141    |    |  |  |  |   | (1,400   | )  |
| Interestpayable                                                                 |  |  |                               |   | (65      | )  |  |  |  |   | (269     | )  |
| Accruedpremiums payable on creditswaps                                          |  |  |                               |   | 42       |    |  |  |  |   | —  |    |
| Taxespayable                                                                    |  |  |                               |   | (35      | )  |  |  |  |   | 208      |    |
| Deferredcredit swappremiums                                                     |  |  |                               |   | (17      | )  |  |  |  |   | (17      | )  |
| Deferredfinancial guaranteepremiums                                             |  |  |                               |   | (301     | )  |  |  |  |   | (299     | )  |
| Netcash provided by operatingactivities                                         |  |  |                               |   | 32,470   |    |  |  |  |   | 23,638   |    |
| Cashflows from investingactivities                                              |  |  |                               |   |     |    |  |  |  |   |     |    |
| Fixed assetpurchases and capitalized softwarecosts                              |  |  |                               |   | (2,631   | )  |  |  |  |   | (519     | )  |
| Purchases ofavailable-for-saleinvestments                                       |  |  |                               |   | (103,129 | )  |  |  |  |   | (258,165 | )  |
| Maturitiesof available-for-saleinvestments                                      |  |  |                               |   | 67,000   |    |  |  |  |   | —  |    |
| Netcash used in investingactivities                                             |  |  |                               |   | (38,760  | )  |  |  |  |   | (258,684 | )  |
| Cashflows from financingactivities                                              |  |  |                               |   |     |    |  |  |  |   |     |    |
| Repurchase andretirement of commonstock                                         |  |  |                               |   | (684     | )  |  |  |  |   | (2,397   | )  |
| Proceeds fromemployee exercise of stock options and issuance of commonstock     |  |  |                               |   | 454      |    |  |  |  |   | 234      |    |
| Debt issuancecosts                                                              |  |  |                               |   | (13      | )  |  |  |  |   | (31      | )  |
| Net preferreddistributions ofsubsidiary                                         |  |  |                               |   | (4,206   | )  |  |  |  |   | (2,798   | )  |
| Netcash used in financingactivities                                             |  |  |                               |   | (4,449   | )  |  |  |  |   | (4,992   | )  |
| Neteffect of exchange rate changes oncash                                       |  |  |                               |   | 85       |    |  |  |  |   | —  |    |
| Net decrease incash                                                             |  |  |                               |   | (10,654  | )  |  |  |  |   | (240,038 | )  |
| Cash andcash equivalents at beginning ofperiod                                  |  |  |                               |   | 69,355   |    |  |  |  |   | 320,989  |    |
| Cashand cash equivalents at end ofperiod                                        |  |  |                               | $ | 58,701   |    |  |  |  | $ | 80,951   |    |
| Supplementaldisclosures                                                         |  |  |                               |   |     |    |  |  |  |   |     |    |
| Cash paid forinterest                                                           |  |  |                               | $ | 7,870    |    |  |  |  | $ | 1,879    |    |
| Cash paid fortaxes                                                              |  |  |                               | $ | 76       |    |  |  |  | $ | 4        |    |
|                                                                                 |

Seeaccompanying notes.

5

----

Table of Contents

|          |                                       |
|----------|---------------------------------------|
| 1.  | Organizationand Basis of Presentation |

Primus Guaranty, Ltd., together withits consolidated subsidiaries (‘‘PrimusGuaranty’’ or ‘‘theCompany’’), is a Bermuda holding company, and the100% owner of Primus Bermuda, Ltd. (‘‘PrimusBermuda’’), a Bermuda holding company and PRS TradingStrategies, LLC. Primus Bermuda is the 100% owner of PrimusGroup Holdings, LLC (‘‘Primus GroupHoldings’’), a Delaware limited liability company. PrimusGroup Holdings has two principal operating subsidiaries, PrimusFinancial Products, LLC (‘‘PrimusFinancial’’), and Primus Asset Management, Inc.(‘‘Primus Asset Management’’). PrimusFinancial is a Delaware financial products limited liability companythat maintains a long-term counterparty credit rating of AAA fromStandard & Poor’s (‘‘S&P’’)and Aaa from Moody’s Investors Service, Inc.(‘‘Moody’s’’ and, together withS&P, the ‘‘Rating Agencies’’). PrimusFinancial is primarily a seller of credit swaps against investmentgrade credit obligations of corporate and sovereign reference entities.Primus Financial also sells credit swaps referencing portfolioscontaining obligations of multiple reference entities. Primus AssetManagement, a Delaware services company, is an asset manager for PrimusFinancial and unrelated third parties.

Primus Financial andPrimus Asset Management function as separate entities from Primus GroupHoldings. Additionally, the obligations of Primus Guaranty are not theobligations of Primus Bermuda, Primus Group Holdings, or any other ofits affiliates, and vice versa. Primus Asset Management is the100% owner of Primus Re, Ltd. (‘‘PrimusRe’’), a Bermuda company that operates as a financialguaranty insurance company and is licensed as a Class 3 Insurer underthe Insurance Act of 1978 of Bermuda.

In July  2005, PRSTrading Strategies, LLC (PRS Trading), a Delaware limited liabilitycompany, was formed. PRS Trading engages in relative value trading andother strategies involving buying and selling of credit swaps and otherfinancial instruments in pursuit of financial returns. These tradingstrategies generally have a short-term investment horizon and aresubject to tight risk controls and liquidity management. PRS Tradingcommenced operations in January  2006. PRS Trading does notengage in trading activity with Primus Financial. PRS Trading has norating from the rating agencies and, accordingly generally provides itsswap counterparties with collateral to support its contractualobligations. More recently, PRS Trading has entered into total returnswaps and a loan warehouse financing arrangement.

InNovember  2005, Primus Guaranty (UK), Ltd. (PGUK) wasincorporated in England to expand the Company’s presence andfurther develop its business and relationships across Europe. PrimusBermuda is the 100% owner of PGUK.

The accompanyingunaudited condensed consolidated financial statements of PrimusGuaranty have been prepared in accordance with U.S. generally acceptedaccounting principles for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for completefinancial statements. In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for afair presentation have been included. Operating results for the periodspresented are not necessarily indicative of the results that may beexpected for any other interim period or for the year endedDecember  31,  2006. The condensed consolidated financialstatements include the accounts of the Company and its wholly ownedsubsidiaries. All significant intercompany balances have beeneliminated.

The condensed consolidated financial statementsrepresent a single reportable segment, as defined in Statement ofFinancial Accounting Standards (‘‘SFAS’’)No. 131, Disclosures about Segments of an Enterprise and RelatedInformation.

The condensed consolidated financial statementsare presented in U.S. dollar equivalents. At September30,  2006 and December  31,  2005, theCompany’s credit swap activities were conducted in U.S. dollarsand euros.

Certain prior year amounts have been reclassified toconform to current year presentation.

6

----

Table of Contents

|          |                                 |
|----------|---------------------------------|
| 2.  | Recent AccountingPronouncements |

In December  2004, the Financial AccountingStandards Board (‘‘FASB’’) issued SFAS No.123 (R), Share-Based Payment. SFAS No. 123(R) is arevision of SFAS No. 123 and supersedes Accounting Principles Board(‘‘APB’’) Opinion No. 25, Accounting forStock Issued to Employees, and amends SFAS No. 95, Statement ofCash Flows. SFAS No. 123(R) eliminates the ability to account forshare-based compensation transactions using APB Opinion No. 25 andrequires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the financial statementsusing a fair value-based method. In April  2005, the Securitiesand Exchange Commission (‘‘SEC’’) amendedthe effective date of SFAS No. 123(R) until the first fiscal yearbeginning after June  15,  2005 to provide additional timefor companies to comply with the reporting requirements. EffectiveJanuary  1,  2006, the Company adopted SFAS No. 123(R). Seenote 9 of notes to condensed consolidated financial statements forfurther detail.

In March  2005, the SEC staff issued StaffAccounting Bulletin No. 107 (‘‘SAB No.107’’) to provide supplemental implementation guidance onSFAS No. 123(R). The Company applied the relevant provisions of SAB No.107 in its adoption of SFAS No. 123(R).

In May  2005, theFASB issued SFAS 154, Accounting Changes and Error Corrections– a replacement of APB Opinion No. 20 and FASB Statement No.3. This statement requires retrospective application to priorperiods’ financial statements of changes in accountingprinciple. SFAS 154 is effective for accounting changes and correctionsof errors made in fiscal years beginning after December15,  2005. The Company will apply SFAS 154 in future periods, ifapplicable.

In November  2005, the FASB issued FASB StaffPosition FSP 115-1, The Meaning of Other-Than Temporary Impairmentand Its Application to Certain Investments (FSP 115-1), whichaddresses the determination as to when an investment is consideredimpaired, whether that impairment is other-than-temporary, and themeasurement of an impairment loss. FSP 115-1 also includes accountingconsiderations subsequent to the recognition of an other-than-temporaryimpairment and requires certain disclosures about unrealized lossesthat have not been recognized as other-than-temporary impairments. Theguidance in FSP 115-1 is required to be applied to reporting periodsbeginning after December 15, 2005. The adoption did not have anyeffect on the condensed consolidated financial statements.

InJune  2006, the FASB issued Interpretation No. 48, Accountingfor Uncertainty in Income Taxes-an interpretation of FASB Statement No.109 (FIN 48). FIN 48 prescribes a recognition threshold andmeasurement attributes for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a taxreturn. FIN 48 also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition. FIN 48 is effective for fiscal years beginning afterDecember  15,  2006. The Company is currently evaluatingthe impact that adoption of FIN 48 will have on its consolidatedfinancial statements.

In September  2006, the FASB issuedSFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS 157defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles (GAAP), and expandsdisclosures about fair value measurements. SFAS No. 157 is effectivefor fiscal years beginning after November  15,  2007. TheCompany is currently evaluating the impact that adoption of SFAS No.157 will have on its consolidated financialstatements.

|          |                               |
|----------|-------------------------------|
| 3.  | Available-for-SaleInvestments |

Available-for-sale investments included U.S.government agency obligations (including government-sponsoredenterprises) rated AAA and Aaa by the respective rating agencies andcommercial paper rated A-1 and P-1 by the respective rating agencies.Available-for-sale investments have original maturities or maturitiesat time of purchase greater than 90 days.

7

----

Table of Contents

The following table summarizes thecomposition of the Company’s available-for-sale investments atSeptember  30,  2006 and December  31,  2005(inthousands):

|                                 |  |  |                    |   |         |                  |  |  |                  |   |         |                      |  |  |  |   |         |         |  |  |  |   |         |        |
|---------------------------------|--|--|--------------------|---|---------|------------------|--|--|------------------|---|---------|----------------------|--|--|--|---|---------|---------|--|--|--|---|---------|--------|
|                            |  |  | September  30,2006 |
|                            |  |  | AmortizedCost      |   |         | Unrealized Gains |  |  | UnrealizedLosses |   |         | Estimated Fair Value |
| U.Sgovernment agencyobligations |  |  |                    | $ | 572,411 |             |  |  |                  | $ | — |                 |  |  |  | $ | (3,279  | )  |  |  |  | $ | 569,132 |   |
| Commercialpaper                 |  |  |                    |   | 30,788  |             |  |  |                  |   | 12      |                 |  |  |  |   | — |    |  |  |  |   | 30,800  |   |
| Total                           |  |  |                    |   | 603,199 |             |  |  |                  |   | 12      |                 |  |  |  |   | (3,279  | )  |  |  |  |   | 599,932 |   |
|                                 |

|                                 |  |  |                   |   |         |                  |  |  |                  |   |         |                      |  |  |  |   |         |         |  |  |  |   |         |        |
|---------------------------------|--|--|-------------------|---|---------|------------------|--|--|------------------|---|---------|----------------------|--|--|--|---|---------|---------|--|--|--|---|---------|--------|
|                            |  |  | December  31,2005 |
|                            |  |  | AmortizedCost     |   |         | Unrealized Gains |  |  | UnrealizedLosses |   |         | Estimated Fair Value |
| U.Sgovernment agencyobligations |  |  |                   | $ | 544,824 |             |  |  |                  | $ | — |                 |  |  |  | $ | (4,259  | )  |  |  |  | $ | 540,565 |   |
| Commercialpaper                 |  |  |                   |   | 19,577  |             |  |  |                  |   | 5       |                 |  |  |  |   | — |    |  |  |  |   | 19,582  |   |
| Total                           |  |  |                   | $ | 564,401 |             |  |  |                  | $ | 5       |                 |  |  |  | $ | (4,259  | )  |  |  |  | $ | 560,147 |   |
|                                 |

Theunrealized losses on the Company’s investments in U.S.government agency obligations were the result of an increase ininterest rates during the first nine months of 2006 and during 2005.These securities have primarily been in a loss position for more than12 months. Because the decline in market value is attributable tochanges in interest rates and not credit quality, and the Company hasthe ability and intent to hold these investments until maturity, theCompany does not consider these investments to beother-than-temporarily impaired at September  30,  2006 andDecember  31,  2005. These securities have maturities ofless than 3 years.

|          |                    |
|----------|--------------------|
| 4.  | TradingInvestments |

During the end of the third quarter of 2006,PRS Trading purchased corporate bonds for trading purposes. Tradinginvestments are carried at fair value, with unrealized gains or lossesrecorded in the condensed consolidated statements of operations. AtSeptember  30,  2006, the fair value of these tradinginvestments was approximately $1.3  million.

|          |                                                 |
|----------|-------------------------------------------------|
| 5.  | NetCredit Swap Revenue and Credit SwapPortfolio |

Overview

Net credit swap revenue aspresented in the condensed consolidated statements of operationscomprises changes in the fair value of credit swaps, realized gains orlosses on the termination of credit swaps and premium income orexpense. The realized gains and losses on credit swaps representrealized gains and losses on the termination of credit swaps. Therealization of gains or losses on credit swaps will generally result ina reduction in unrealized gains or losses and accrued premium at thepoint in time realization occurs.

Credit swaps are derivativetransactions that obligate one party to the transaction (the‘‘Seller’’) to pay an amount to the otherparty to the transaction (the ‘‘Buyer’’)should an unrelated third party or portfolio of third parties (the‘‘Reference Entity’’) specified in thecontract be subject to one of a specified group of events(‘‘Credit Events’’). The amount to be paidby the Seller will either be (a) the notional amount of thetransaction, in exchange for which the Seller must be delivered adefined obligation of the Reference Entity (called physicalsettlement), or (b) the difference between the current market value ofa defined obligation of the Reference Entity and the notional amount ofthe transaction (called cash settlement). In exchange for taking therisk of the contract, the Seller will receive a fixed premium for theterm of the contract (or until the occurrence of a Credit Event). Thefixed premium is generally paid quarterly in arrears over the term ofthe transaction. Premium income is recognized ratably over the life ofthe transaction as a component of net credit swap revenue. When theCompany purchases credit swaps from its counterparties, the Companypays fixed premiums over the term of the contract. Premium expense isrecognized ratably over the life of the transaction as a component ofnet credit swap revenue.

8

----

Table of Contents

All credit swap transactions entered intobetween the Buyer and the Seller, or will shortly be, are subject to anInternational Swaps and Derivatives Association, Inc. Master Agreementor (‘‘ISDA Master Agreement’’) executed byboth parties. The Master Agreement allows for the consolidation of themarket exposures and termination of all transactions between the Buyerand Seller in the event a Default (as defined by the Master Agreement)occurs in respect of either party.

The primary risks inherent inthe Company’s activities are (a) where the Company is a Sellerthat Reference Entities specified in its credit swap transactions willexperience Credit Events that will require the Company to make paymentsto the Buyers of the transactions. Credit Events may include any or allof the following: bankruptcy, failure to pay, repudiation ormoratorium, and modified or original restructuring, (b) where theCompany is a Buyer of a credit swap and a Credit Event occurs, theSeller fails to make payment to the Company, and (c) that Buyers of thetransactions from the Company will default on their required premiumpayments. During the three and nine months ended September30,  2006 and 2005, none of these events have occurred.

TheCompany terminates a credit swap in one of two ways. The Company maynegotiate an agreed termination with the original counterparty (anunwind). The Company may negotiate an assignment and novation of itsrights and obligations under the credit swap to a third party (anassignment). As an alternative to terminating a transaction, in orderto reduce its exposure, the Company may enter into an equal andopposite transaction with a third party under which the Companypurchases credit swaps on terms that match the terms of the originaltransaction (an offset). In this last case, both sides of the positionmay subsequently be unwound or assigned.

In the event of anunwind or assignment, the Company pays or receives a cash settlementnegotiated with the counterparty or assignee, based on the fair valueof the credit swap contract and the accrued premium on the swapcontract at the time of negotiation. The amounts the Company pays orreceives are recorded as a realization of fair value and as arealization of accrued premiums in the period in which the terminationoccurs.

In accordance with accounting principles generallyaccepted in the United States, the Company carries its credit swaps onits condensed consolidated statements of financial condition at theirfair value. Changes in the fair value of the Company’s creditswap portfolio are recorded as unrealized gains or losses as acomponent of net credit swap revenue in the Company’sconsolidated statements of operations. If a credit swap has an increasein fair value during a period, the increase will add to theCompany’s net credit swap revenue for that period. Conversely,if a credit swap has a decline in fair value during the period, thedecline will subtract from the Company’s net credit swap revenuefor that period. Changes in the fair value of the Company’scredit swap portfolio are a function of the notional amount andcomposition of the portfolio and prevailing market credit swap premiumsfor comparable credit swaps. The Company generally holds the creditswaps it sells to maturity, at which point, assuming no credit eventhas occurred, the cumulative unrealized gains and losses on each creditswap would equal zero.

In general, the Company aggregates fairvalues of individual credit swaps by counterparty for presentation onthe Company’s condensed consolidated statements of financialcondition. If the aggregate total of fair values with a counterparty isa net gain, the total is recorded as a component of unrealized gains oncredit swaps, at fair value in the condensed consolidated statements offinancial condition. If the aggregate total of fair values with acounterparty is a net loss, the total is recorded as a component ofunrealized losses on credit swaps, at fair value in the condensedconsolidated statements of financial condition. Aggregation bycounterparty is applied where a valid ISDA master agreement is in placewith the counterparty. In instances where the Company does not yet havea valid ISDA master agreement with the counterparty, the fair values ofindividual swap transactions are recorded as components of unrealizedgains or losses on credit swaps, at fair value, dependent upon whetherthe individual contract was at a gain or a loss.

TheCompany’s portfolio of credit swaps is generally held by PrimusFinancial and PRS Trading.

Primus Financial

Under theterms of Primus Financial’s operating guidelines, derivativestransactions can only include credit swaps.

9

----

Table of Contents

Primus Financial is primarily a Seller ofcredit swaps, although it may also buy credit swaps to off-set therisks it has incurred as a Seller. Credit swaps purchased to off-setrisks do not qualify as hedges in accordance with SFAS No. 133. As ageneral rule, when Primus Financial sells credit swaps, it intends tomaintain the transaction until maturity. However, there are two sets ofcircumstances in which the Company could elect to terminatetransactions prior to maturity, and the Company monitors its portfolioon a continuing basis to assess whether those circumstances arepresent.

First, whenever Primus Financial receives newinformation suggesting that the credit quality of the underlying riskhas deteriorated to a material degree, the Company considers thepossibility of terminating the transaction, usually at a loss, to avoidthe larger loss that could result if the credit swap were to remain inplace until a credit event occurs.

Second, Primus Financial mayelect to terminate a transaction for which it has an unrealized gain orloss based on one or more of the following considerations: thelikelihood of further gains or losses arising from the position, itsview as to whether the capital dedicated to the position would beprofitably reallocated, its total exposure to a particular ReferenceEntity, the total size of its portfolio in relation to its capital andthe total size of its swap positions and exposures with a particularcounterparty which might be reduced so that the counterparty may enterinto additional swaps with Primus Financial.

Primus Financialdistinguishes among credit swaps sold-single name and credit swapssold-tranche. Credit swaps sold-single name refers to credit swapsreferencing a single entity. Credit swaps sold-tranche refers to creditswaps referencing portfolios containing obligations of multiplereference entities, which Primus Financial began selling during thesecond quarter of 2005.

PRS Trading

PRS Trading engagesin relative value trading and other strategies involving buying andselling of credit swaps and other financial instruments in pursuit offinancial returns. These trading strategies generally have a short-terminvestment horizon and are subject to tight risk controls and liquiditymanagement. PRS Trading commenced operations in January  2006.PRS Trading does not engage in trading activity with Primus Financial.PRS Trading has no rating from the rating agencies and, accordinglygenerally provides its swap counterparties with collateral to supportits contractual obligations. Credit swaps purchased to off-set risks donot qualify as hedges in accordance with SFAS No. 133. PRS Trading alsotransacts in credit default swap indices (CDS index), which areover-the-counter transactions based on the risk of credit defaultsagainst a pool of sub-investment grade corporate referenceentities.

Consolidated Net Credit Swap Revenue and Credit SwapPortfolio Information

The tables below present the components ofconsolidated net credit swap revenue for the three and nine monthsended September  30,  2006 and 2005 (in thousands):

|                                   |  |  |                                 |   |        |                               |  |  |      |   |        |         |  |  |  |   |        |         |  |  |  |   |         |         |
|-----------------------------------|--|--|---------------------------------|---|--------|-------------------------------|--|--|------|---|--------|---------|--|--|--|---|--------|---------|--|--|--|---|---------|---------|
|                              |  |  | ThreeMonths Ended September 30, |   |        | Nine Months EndedSeptember30, |
|                              |  |  | 2006                            |   |        | 2005                          |  |  | 2006 |   |        | 2005    |
| Netpremiumincome                  |  |  |                                 | $ | 18,034 |                          |  |  |      | $ | 13,962 |    |  |  |  | $ | 51,081 |    |  |  |  | $ | 37,561  |    |
| Realizedgains                     |  |  |                                 |   | 101    |                          |  |  |      |   | 216    |    |  |  |  |   | 1,043  |    |  |  |  |   | 1,461   |    |
| Realizedlosses                    |  |  |                                 |   | (1,927 | )                        |  |  |      |   | (1,464 | )  |  |  |  |   | (3,141 | )  |  |  |  |   | (4,513  | )  |
| Changein unrealized gains(losses) |  |  |                                 |   | 12,697 |                          |  |  |      |   | 14,735 |    |  |  |  |   | 36,882 |    |  |  |  |   | (18,837 | )  |
| Totalnet credit swaprevenue       |  |  |                                 | $ | 28,905 |                          |  |  |      | $ | 27,449 |    |  |  |  | $ | 85,865 |    |  |  |  | $ | 15,672  |    |
|                                   |

10

----

Table of Contents

The Company’s consolidated notionalamount, fair value and average fair value of open credit swaptransactions (excluding the CDS index) entered into with third partiesat September  30,  2006 and December  31,  2005are as follows (in thousands):

|                                  |  |  |                   |   |            |                  |  |  |  |   |            |        |
|----------------------------------|--|--|-------------------|---|------------|------------------|--|--|--|---|------------|--------|
|                             |  |  | September30, 2006 |   |            | December 31,2005 |
| Gross NotionalAmounts:           |  |  |                   |   |       |             |  |  |  |   |       |   |
| Credit swapssold-singlename      |  |  |                   | $ | 15,377,221 |             |  |  |  | $ | 13,374,031 |   |
| Creditswapssold-tranche          |  |  |                   |   | 350,000    |             |  |  |  |   | 50,000     |   |
| Creditswaps purchased-singlename |  |  |                   |   | (192,156   | )           |  |  |  |   | —    |   |
| Fairvalue:                       |  |  |                   |   |       |             |  |  |  |   |       |   |
| Asset                            |  |  |                   |   | 59,930     |             |  |  |  |   | 25,342     |   |
| Liability                        |  |  |                   |   | 1,110      |             |  |  |  |   | 3,521      |   |
| Averagefairvalue:                |  |  |                   |   |       |             |  |  |  |   |       |   |
| Asset                            |  |  |                   |   | 51,575     |             |  |  |  |   | 28,140     |   |
| Liability                        |  |  |                   |   | 2,064      |             |  |  |  |   | 3,545      |   |
|                                  |

‘‘Asset’’in the table above represents unrealized gains on credit swaps while‘‘Liability’’ represents unrealized losseson credit swaps. All credit swaps are subject to netting arrangementsthat have been contractually established independently by PrimusFinancial and PRS Trading with each counterparty under an ISDA MasterAgreement. The notional amounts of the credit swap contracts in thepreceding table are presented on a gross basis and the fair values ofsuch contracts are netted by counterparty.

At September30,  2006 and December  31,  2005, Primus Financialhad three derivative transactions with its affiliate, Primus Re,totaling $87  million in notional principal which are eliminatedin consolidation.

11

----

Table of Contents

The tables that follow summarize, bycredit rating of Reference Entities and of Counterparties, theconsolidated notional amounts and fair values of credit swaptransactions outstanding (excluding transactions with affiliates and anegative $240  thousand net fair value associated with the CDSindex and total return swaps, as discussed in note 6) for the Companyas of September  30,  2006 and December  31,2005 (in thousands):

(inthousands)

|                                      |  |  |                    |   |            |                   |  |  |                |   |        |           |  |  |  |   |            |        |  |  |  |   |         |         |
|--------------------------------------|--|--|--------------------|---|------------|-------------------|--|--|----------------|---|--------|-----------|--|--|--|---|------------|--------|--|--|--|---|---------|---------|
|                                 |  |  | September30,  2006 |   |            | December  31,2005 |
| Moody’sRating Category         |  |  | NotionalAmount     |   |            | Fair Value        |  |  | NotionalAmount |   |        | FairValue |
| ReferenceEntity/Tranche              |  |  |                    |   |       |              |  |  |                |   |   |      |  |  |  |   |       |   |  |  |  |   |    |    |
| CreditSwaps Sold – SingleName: |  |  |                    |   |       |              |  |  |                |   |   |      |  |  |  |   |       |   |  |  |  |   |    |    |
| Aaa                                  |  |  |                    | $ | 784,352    |              |  |  |                | $ | 1,492  |      |  |  |  | $ | 561,472    |   |  |  |  | $ | 1,118   |    |
| Aa                                   |  |  |                    |   | 2,601,928  |              |  |  |                |   | 9,520  |      |  |  |  |   | 2,268,090  |   |  |  |  |   | 8,006   |    |
| A                                    |  |  |                    |   | 5,851,422  |              |  |  |                |   | 24,711 |      |  |  |  |   | 5,270,706  |   |  |  |  |   | 15,008  |    |
| Baa                                  |  |  |                    |   | 5,612,040  |              |  |  |                |   | 28,316 |      |  |  |  |   | 5,041,442  |   |  |  |  |   | 4,328   |    |
| Ba                                   |  |  |                    |   | 467,807    |              |  |  |                |   | (895   | )    |  |  |  |   | 199,321    |   |  |  |  |   | (5,785  | )  |
| B                                    |  |  |                    |   | 59,672     |              |  |  |                |   | (2,634 | )    |  |  |  |   | 33,000     |   |  |  |  |   | (1,539  | )  |
| Total                                |  |  |                    | $ | 15,377,221 |              |  |  |                | $ | 60,510 |      |  |  |  | $ | 13,374,031 |   |  |  |  | $ | 21,136  |    |
| CreditSwaps Sold –Tranche:     |  |  |                    |   |       |              |  |  |                |   |   |      |  |  |  |   |       |   |  |  |  |   |    |    |
| Aa                                   |  |  |                    | $ | 150,000    |              |  |  |                | $ | 938    |      |  |  |  | $ | 50,000     |   |  |  |  | $ | 685     |    |
| A                                    |  |  |                    |   | 200,000    |              |  |  |                |   | (2,076 | )    |  |  |  |   | —    |   |  |  |  |   | — |    |
| Total                                |  |  |                    | $ | 350,000    |              |  |  |                | $ | (1,138 | )    |  |  |  | $ | 50,000     |   |  |  |  | $ | 685     |    |
| CreditSwapsPurchased                 |  |  |                    |   |       |              |  |  |                |   |   |      |  |  |  |   |       |   |  |  |  |   |    |    |
| A                                    |  |  |                    | $ | (65,344    | )            |  |  |                | $ | (131   | )    |  |  |  | $ | —    |   |  |  |  | $ | — |    |
| Baa                                  |  |  |                    |   | (111,812   | )            |  |  |                |   | (361   | )    |  |  |  |   | —    |   |  |  |  |   | — |    |
| Ba                                   |  |  |                    |   | (15,000    | )            |  |  |                |   | (60    | )    |  |  |  |   | —    |   |  |  |  |   | — |    |
| Total                                |  |  |                    | $ | (192,156   | )            |  |  |                | $ | (552   | )    |  |  |  | $ | —    |   |  |  |  | $ | — |    |
| CounterpartyBuyer                    |  |  |                    |   |       |              |  |  |                |   |   |      |  |  |  |   |       |   |  |  |  |   |    |    |
| CreditSwaps Sold – SingleName: |  |  |                    |   |       |              |  |  |                |   |   |      |  |  |  |   |       |   |  |  |  |   |    |    |
| Aaa                                  |  |  |                    | $ | 5,000      |              |  |  |                | $ | 16     |      |  |  |  | $ | 5,000      |   |  |  |  | $ | 37      |    |
| Aa                                   |  |  |                    |   | 12,841,615 |              |  |  |                |   | 50,246 |      |  |  |  |   | 11,228,563 |   |  |  |  |   | 13,341  |    |
| A                                    |  |  |                    |   | 2,530,606  |              |  |  |                |   | 10,248 |      |  |  |  |   | 2,140,468  |   |  |  |  |   | 7,758   |    |
| Total                                |  |  |                    | $ | 15,377,221 |              |  |  |                | $ | 60,510 |      |  |  |  | $ | 13,374,031 |   |  |  |  | $ | 21,136  |    |
| CreditSwaps Sold –Tranche:     |  |  |                    |   |       |              |  |  |                |   |   |      |  |  |  |   |       |   |  |  |  |   |    |    |
| Aa                                   |  |  |                    | $ | 350,000    |              |  |  |                | $ | (1,138 | )    |  |  |  | $ | 50,000     |   |  |  |  | $ | 685     |    |
| Total                                |  |  |                    | $ | 350,000    |              |  |  |                | $ | (1,138 | )    |  |  |  | $ | 50,000     |   |  |  |  | $ | 685     |    |
| CounterpartySeller                   |  |  |                    |   |       |              |  |  |                |   |   |      |  |  |  |   |       |   |  |  |  |   |    |    |
| CreditSwapsPurchased:                |  |  |                    |   |       |              |  |  |                |   |   |      |  |  |  |   |       |   |  |  |  |   |    |    |
| Aa                                   |  |  |                    | $ | (192,156   | )            |  |  |                | $ | (552   | )    |  |  |  | $ | —    |   |  |  |  | $ | — |    |
| Total                                |  |  |                    | $ | (192,156   | )            |  |  |                | $ | (552   | )    |  |  |  | $ | —    |   |  |  |  | $ | — |    |
|                                      |

12

----

Table of Contents

(in thousands)

|                                      |  |  |                    |   |            |                   |  |  |                |   |         |           |  |  |  |   |            |        |  |  |  |   |         |         |
|--------------------------------------|--|--|--------------------|---|------------|-------------------|--|--|----------------|---|---------|-----------|--|--|--|---|------------|--------|--|--|--|---|---------|---------|
|                                 |  |  | September30,  2006 |   |            | December  31,2005 |
| S&PRatingCategory                |  |  | NotionalAmount     |   |            | FairValue         |  |  | NotionalAmount |   |         | FairValue |
| ReferenceEntity/Tranche              |  |  |                    |   |       |              |  |  |                |   |    |      |  |  |  |   |       |   |  |  |  |   |    |    |
| CreditSwaps Sold – SingleName: |  |  |                    |   |       |              |  |  |                |   |    |      |  |  |  |   |       |   |  |  |  |   |    |    |
| AAA                                  |  |  |                    | $ | 898,040    |              |  |  |                | $ | 1,773   |      |  |  |  | $ | 636,472    |   |  |  |  | $ | 1,222   |    |
| AA                                   |  |  |                    |   | 2,230,264  |              |  |  |                |   | 8,243   |      |  |  |  |   | 1,862,713  |   |  |  |  |   | 6,026   |    |
| A                                    |  |  |                    |   | 6,597,765  |              |  |  |                |   | 27,708  |      |  |  |  |   | 6,143,717  |   |  |  |  |   | 17,753  |    |
| BBB                                  |  |  |                    |   | 5,234,559  |              |  |  |                |   | 26,243  |      |  |  |  |   | 4,513,356  |   |  |  |  |   | 4,803   |    |
| BB                                   |  |  |                    |   | 354,921    |              |  |  |                |   | (760    | )    |  |  |  |   | 197,773    |   |  |  |  |   | (7,062  | )  |
| B                                    |  |  |                    |   | 61,672     |              |  |  |                |   | (2,697  | )    |  |  |  |   | 20,000     |   |  |  |  |   | (1,606  | )  |
| Total                                |  |  |                    | $ | 15,377,221 |              |  |  |                | $ | 60,510  |      |  |  |  | $ | 13,374,031 |   |  |  |  | $ | 21,136  |    |
| CreditSwaps Sold –Tranche:     |  |  |                    |   |       |              |  |  |                |   |    |      |  |  |  |   |       |   |  |  |  |   |    |    |
| AAA                                  |  |  |                    | $ | 150,000    |              |  |  |                | $ | (1,400  | )    |  |  |  | $ | —    |   |  |  |  | $ | — |    |
| AA                                   |  |  |                    |   | 200,000    |              |  |  |                |   | 262     |      |  |  |  |   | 50,000     |   |  |  |  |   | 685     |    |
| Total                                |  |  |                    | $ | 350,000    |              |  |  |                | $ | (1,138  | )    |  |  |  | $ | 50,000     |   |  |  |  | $ | 685     |    |
| CreditSwapsPurchased:                |  |  |                    |   |       |              |  |  |                |   |    |      |  |  |  |   |       |   |  |  |  |   |    |    |
| A                                    |  |  |                    | $ | (40,000    | )            |  |  |                | $ | (80     | )    |  |  |  | $ | —    |   |  |  |  | $ | — |    |
| BBB                                  |  |  |                    |   | (152,156   | )            |  |  |                |   | (472    | )    |  |  |  |   | —    |   |  |  |  |   | — |    |
| BB                                   |  |  |                    |   | —    |              |  |  |                |   | — |      |  |  |  |   | —    |   |  |  |  |   | — |    |
| Total                                |  |  |                    | $ | (192,156   | )            |  |  |                | $ | (552    | )    |  |  |  | $ | —    |   |  |  |  | $ | — |    |
| CounterpartyBuyer                    |  |  |                    |   |       |              |  |  |                |   |    |      |  |  |  |   |       |   |  |  |  |   |    |    |
| CreditSwaps Sold – SingleName: |  |  |                    |   |       |              |  |  |                |   |    |      |  |  |  |   |       |   |  |  |  |   |    |    |
| AAA                                  |  |  |                    | $ | 36,680     |              |  |  |                | $ | 70      |      |  |  |  | $ | 34,623     |   |  |  |  | $ | (57     | )  |
| AA                                   |  |  |                    |   | 11,590,518 |              |  |  |                |   | 47,254  |      |  |  |  |   | 9,262,316  |   |  |  |  |   | 10,525  |    |
| A                                    |  |  |                    |   | 3,750,023  |              |  |  |                |   | 13,186  |      |  |  |  |   | 4,077,092  |   |  |  |  |   | 10,668  |    |
| Total                                |  |  |                    | $ | 15,377,221 |              |  |  |                | $ | 60,510  |      |  |  |  | $ | 13,374,031 |   |  |  |  | $ | 21,136  |    |
| CreditSwaps Sold –Tranche:     |  |  |                    |   |       |              |  |  |                |   |    |      |  |  |  |   |       |   |  |  |  |   |    |    |
| AA                                   |  |  |                    | $ | 350,000    |              |  |  |                | $ | (1,138  | )    |  |  |  | $ | 50,000     |   |  |  |  | $ | 685     |    |
| Total                                |  |  |                    | $ | 350,000    |              |  |  |                | $ | (1,138  | )    |  |  |  | $ | 50,000     |   |  |  |  | $ | 685     |    |
| CounterpartySeller                   |  |  |                    |   |       |              |  |  |                |   |    |      |  |  |  |   |       |   |  |  |  |   |    |    |
| CreditSwapsPurchased:                |  |  |                    |   |       |              |  |  |                |   |    |      |  |  |  |   |       |   |  |  |  |   |    |    |
| AA                                   |  |  |                    | $ | (121,812   | )            |  |  |                | $ | (517    | )    |  |  |  | $ | —    |   |  |  |  | $ | — |    |
| A                                    |  |  |                    |   | (70,344    | )            |  |  |                |   | (35     | )    |  |  |  |   | —    |   |  |  |  |   | — |    |
| Total                                |  |  |                    | $ | (192,156   | )            |  |  |                | $ | (552    | )    |  |  |  | $ | —    |   |  |  |  | $ | — |    |
|                                      |

PrimusFinancial’s and PRS Trading’s counterparties aregenerally financial institutions with whom it has entered into MasterAgreements. For the nine months ended September  30,  2006and 2005, respectively, two counterparties and three counterparties,respectively, each generated greater than ten percent of theCompany’s total premium revenue. At September  30,2006, the notional and fair value amount of credit swaps outstandingwith respect to one non-rated counterparty was $5.0  million and$17  thousand, respectively. The premiums on these transactionswere fully prepaid by the counterparty, and as such, they have beencategorized as AAA/Aaa rating in our credit swapportfolio.

13

----

Table of Contents

The table below shows the geographicaldistribution of the Company’s credit swap portfolio (excludingtransactions with affiliates) by domicile of the Reference Entity anddomicile of the counterparty (in thousands):

|                                     |  |  |                   |   |            |                  |  |  |                |   |        |           |  |  |  |   |            |        |  |  |  |   |         |         |
|-------------------------------------|--|--|-------------------|---|------------|------------------|--|--|----------------|---|--------|-----------|--|--|--|---|------------|--------|--|--|--|---|---------|---------|
|                                |  |  | September30, 2006 |   |            | December 31,2005 |
| Countryof Domicile                  |  |  | NotionalAmount    |   |            | FairValue        |  |  | NotionalAmount |   |        | FairValue |
| CreditSwaps Sold – SingleName |  |  |                   |   |       |             |  |  |                |   |   |      |  |  |  |   |       |   |  |  |  |   |    |    |
| ByReferenceEntity:                  |  |  |                   |   |       |             |  |  |                |   |   |      |  |  |  |   |       |   |  |  |  |   |    |    |
| NorthAmerica                        |  |  |                   | $ | 9,247,368  |             |  |  |                | $ | 38,217 |      |  |  |  | $ | 8,243,123  |   |  |  |  | $ | 12,268  |    |
| Europe                              |  |  |                   |   | 5,380,853  |             |  |  |                |   | 20,088 |      |  |  |  |   | 4,561,908  |   |  |  |  |   | 7,412   |    |
| Pacific                             |  |  |                   |   | 565,000    |             |  |  |                |   | 1,362  |      |  |  |  |   | 445,000    |   |  |  |  |   | 992     |    |
| Others                              |  |  |                   |   | 184,000    |             |  |  |                |   | 843    |      |  |  |  |   | 124,000    |   |  |  |  |   | 464     |    |
| Total                               |  |  |                   | $ | 15,377,221 |             |  |  |                | $ | 60,510 |      |  |  |  | $ | 13,374,031 |   |  |  |  | $ | 21,136  |    |
| ByCounterparty:                     |  |  |                   |   |       |             |  |  |                |   |   |      |  |  |  |   |       |   |  |  |  |   |    |    |
| NorthAmerica                        |  |  |                   | $ | 7,971,447  |             |  |  |                | $ | 28,370 |      |  |  |  | $ | 6,878,892  |   |  |  |  | $ | 8,754   |    |
| Europe                              |  |  |                   |   | 7,310,774  |             |  |  |                |   | 31,924 |      |  |  |  |   | 6,388,139  |   |  |  |  |   | 12,359  |    |
| Pacific                             |  |  |                   |   | 75,000     |             |  |  |                |   | 127    |      |  |  |  |   | 65,000     |   |  |  |  |   | (37     | )  |
| Others                              |  |  |                   |   | 20,000     |             |  |  |                |   | 89     |      |  |  |  |   | 42,000     |   |  |  |  |   | 60      |    |
| Total                               |  |  |                   | $ | 15,377,221 |             |  |  |                | $ | 60,510 |      |  |  |  | $ | 13,374,031 |   |  |  |  | $ | 21,136  |    |
| CreditSwaps Sold –Tranche     |  |  |                   |   |       |             |  |  |                |   |   |      |  |  |  |   |       |   |  |  |  |   |    |    |
| ByCounterparty:                     |  |  |                   |   |       |             |  |  |                |   |   |      |  |  |  |   |       |   |  |  |  |   |    |    |
| NorthAmerica                        |  |  |                   | $ | 50,000     |             |  |  |                | $ | 805    |      |  |  |  | $ | 50,000     |   |  |  |  | $ | 685     |    |
| Europe                              |  |  |                   |   | 300,000    |             |  |  |                |   | (1,943 | )    |  |  |  |   | —    |   |  |  |  |   | — |    |
| Total                               |  |  |                   | $ | 350,000    |             |  |  |                | $ | (1,138 | )    |  |  |  | $ | 50,000     |   |  |  |  | $ | 685     |    |
| CreditSwapsPurchased                |  |  |                   |   |       |             |  |  |                |   |   |      |  |  |  |   |       |   |  |  |  |   |    |    |
| ByReferenceEntity:                  |  |  |                   |   |       |             |  |  |                |   |   |      |  |  |  |   |       |   |  |  |  |   |    |    |
| NorthAmerica                        |  |  |                   | $ | (138,000   | )           |  |  |                | $ | (418   | )    |  |  |  | $ | —    |   |  |  |  | $ | — |    |
| Europe                              |  |  |                   |   | (39,156    | )           |  |  |                |   | (79    | )    |  |  |  |   | —    |   |  |  |  |   | — |    |
| Others                              |  |  |                   |   | (15,000    | )           |  |  |                |   | (55    | )    |  |  |  |   | —    |   |  |  |  |   | — |    |
| Total                               |  |  |                   | $ | (192,156   | )           |  |  |                | $ | (552   | )    |  |  |  | $ | —    |   |  |  |  | $ | — |    |
| ByCounterparty:                     |  |  |                   |   |       |             |  |  |                |   |   |      |  |  |  |   |       |   |  |  |  |   |    |    |
| NorthAmerica                        |  |  |                   | $ | (153,820   | )           |  |  |                | $ | (459   | )    |  |  |  | $ | —    |   |  |  |  | $ | — |    |
| Europe                              |  |  |                   |   | (38,336    | )           |  |  |                |   | (93    | )    |  |  |  |   | —    |   |  |  |  |   | — |    |
| Total                               |  |  |                   | $ | (192,156   | )           |  |  |                | $ | (552   | )    |  |  |  | $ | —    |   |  |  |  | $ | — |    |
|                                     |

14

----

Table of Contents

The table below shows the distribution ofthe Company’s credit swap portfolio (excluding related partytransactions) by year of maturity as of September  30,2006 and December  31,  2005 (in thousands):

|                                     |  |  |                   |   |            |                  |  |  |                |   |        |           |  |  |  |   |            |        |  |  |  |   |         |         |
|-------------------------------------|--|--|-------------------|---|------------|------------------|--|--|----------------|---|--------|-----------|--|--|--|---|------------|--------|--|--|--|---|---------|---------|
|                                |  |  | September30, 2006 |   |            | December 31,2005 |
|                                |  |  | NotionalAmount    |   |            | FairValue        |  |  | NotionalAmount |   |        | FairValue |
| CreditSwaps Sold – SingleName |  |  |                   |   |       |             |  |  |                |   |   |      |  |  |  |   |       |   |  |  |  |   |    |    |
| YearofMaturity                      |  |  |                   |   |       |             |  |  |                |   |   |      |  |  |  |   |       |   |  |  |  |   |    |    |
| 2006                                |  |  |                   | $ | 268,421    |             |  |  |                | $ | 64     |      |  |  |  | $ | 939,657    |   |  |  |  | $ | 588     |    |
| 2007                                |  |  |                   |   | 2,435,048  |             |  |  |                |   | 8,645  |      |  |  |  |   | 2,469,188  |   |  |  |  |   | 12,637  |    |
| 2008                                |  |  |                   |   | 1,140,798  |             |  |  |                |   | 7,116  |      |  |  |  |   | 1,129,811  |   |  |  |  |   | 7,948   |    |
| 2009                                |  |  |                   |   | 2,696,410  |             |  |  |                |   | 15,169 |      |  |  |  |   | 2,684,704  |   |  |  |  |   | 5,980   |    |
| 2010                                |  |  |                   |   | 6,171,800  |             |  |  |                |   | 24,014 |      |  |  |  |   | 6,122,897  |   |  |  |  |   | (5,963  | )  |
| 2011                                |  |  |                   |   | 2,664,744  |             |  |  |                |   | 5,502  |      |  |  |  |   | 27,774     |   |  |  |  |   | (54     | )  |
| Total                               |  |  |                   | $ | 15,377,221 |             |  |  |                | $ | 60,510 |      |  |  |  | $ | 13,374,031 |   |  |  |  | $ | 21,136  |    |
| CreditSwaps Sold –Tranche     |  |  |                   |   |       |             |  |  |                |   |   |      |  |  |  |   |       |   |  |  |  |   |    |    |
| YearofMaturity                      |  |  |                   |   |       |             |  |  |                |   |   |      |  |  |  |   |       |   |  |  |  |   |    |    |
| 2010                                |  |  |                   | $ | 50,000     |             |  |  |                | $ | 805    |      |  |  |  | $ | 50,000     |   |  |  |  | $ | 685     |    |
| 2011                                |  |  |                   |   | 50,000     |             |  |  |                |   | 162    |      |  |  |  |   | —    |   |  |  |  |   | — |    |
| 2013                                |  |  |                   |   | 250,000    |             |  |  |                |   | (2,105 | )    |  |  |  |   | —    |   |  |  |  |   | — |    |
| Total                               |  |  |                   | $ | 350,000    |             |  |  |                | $ | (1,138 | )    |  |  |  | $ | 50,000     |   |  |  |  | $ | 685     |    |
| CreditSwapsPurchased                |  |  |                   |   |       |             |  |  |                |   |   |      |  |  |  |   |       |   |  |  |  |   |    |    |
| YearofMaturity                      |  |  |                   |   |       |             |  |  |                |   |   |      |  |  |  |   |       |   |  |  |  |   |    |    |
| 2011                                |  |  |                   | $ | (184,680   | )           |  |  |                | $ | (504   | )    |  |  |  | $ | —    |   |  |  |  | $ | — |    |
| 2016                                |  |  |                   |   | (7,476     | )           |  |  |                |   | (48    | )    |  |  |  |   | —    |   |  |  |  |   | — |    |
| Total                               |  |  |                   | $ | (192,156   | )           |  |  |                | $ | (552   | )    |  |  |  | $ | —    |   |  |  |  | $ | — |    |
|                                     |

|          |                              |
|----------|------------------------------|
| 6.  | NetTotal Return Swap Revenue |

During the second quarter of 2006, theCompany’s subsidiary, PRS Trading entered into a masteragreement for total return swap transactions with a counterparty, whichexpires in May  2008. Under the terms of the agreement, PRSTrading receives interest and other payments based on certain mutuallyagreed reference loans, and pays a financing interest expense based onthe principal amount of such loans. PRS Trading takes the risk that thereferenced loans deteriorate in value and conversely receives thebenefit from any appreciation in the value of loans referenced in eachtotal return swap. The net fair value of each swap is determined by thenet fair value of the referenced loan. PRS Trading determines the fairvalue of the swaps based on the estimated cost to close-out the swappositions. PRS Trading places with the counterparty, initial margincash collateral and ongoing mark-to-market cash collateral, which isdetermined by the fair value of the total return swaps. The totalreturn swap with the counterparty is documented under an ISDA masteragreement between PRS Trading and the counterparty. The net fair valueof all total return swaps is netted with the fair values of any creditswaps outstanding between PRS Trading and the counterparty forpresentation in the condensed consolidated statements of financialcondition.

The total notional amount of loans outstanding underthe total return swaps was $22.5  million at September30,  2006. The net fair value of the total return swaps wasnegative $123  thousand at September  30,2006.

Net total return swap revenue, as presented in thecondensed consolidated statements of operations, comprises changes inthe fair value of the total return swaps, realized gains or losses onthe termination of the total return swaps, and the net interest earnedon the total return swaps. The Company recorded net total return swaprevenue of $313  thousand and $437  thousand for the threeand nine month periods ended September  30,  2006,respectively.

15

----

Table of Contents

|          |                                      |
|----------|--------------------------------------|
| 7.  | Deposit and Warehouse LoanAgreements |

On July  13,  2006, the Company'ssubsidiaries, Primus Asset Management and PRS Trading entered into acredit agreement (together with certain other related agreementshereafter referred to as the ‘‘warehouse loanagreements’’) with a major financial institution and aspecial purpose entity (‘‘CLO’’), for thepurpose of building a portfolio of loan assets, with the expectation ofsubsequently issuing securities in the form of a collateralized loanobligation. Primus Asset Management will act as interim collateralmanager for the CLO. Under the warehouse loan agreements, the CLO isable to finance the purchase and accumulation of loans to an amount upto $400  million. In the interim period, while the CLOaccumulates the loans and before the securities are issued (the‘‘warehouse period’’), the major financialinstitution is funding the purchase of the loans. PRS Trading and themajor financial institution have agreed to share equally in any gainsor losses arising from the sale of loans during the warehouse period,although PRS Trading’s potential loss is limited to an amount of$4  million. PRS Trading has deposited $4  million in cashcollateral with a trustee pursuant to this arrangement. PRS Trading andthe major financial institution have agreed to share equally in the netinterest earned on the loans, after deduction of funding costs.

The total accumulated notional amount of loans outstanding under thewarehouse loan agreements was approximately $253  million atSeptember  30,  2006. The Company has determined, pursuantto FASB Interpretation No. 46 (R), Consolidation of VariableInterest Entities, that it is not the primary beneficiary of thewarehouse loan agreements and, accordingly, the warehouse loans are notconsolidated in the Company's financial statements.

Theseagreements are being treated as derivatives for accounting purposes andare carried at fair value. Net warehouse loan revenue, as presented inthe condensed consolidated statements of operations, comprises PRSTrading’s share under the derivative transaction of net realizedlosses on the termination of individual loan positions and net interestearned on the warehouse loans. The Company recorded net warehouse loanrevenue of $76  thousand for each of the three and nine monthperiods ended September  30,  2006,respectively.

|          |                    |
|----------|--------------------|
| 8.  | Earnings per Share |

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

|                                             |  |  |                                 |   |        |                                |  |  |      |   |        |           |  |  |  |   |        |           |  |  |  |   |        |           |
|---------------------------------------------|--|--|---------------------------------|---|--------|--------------------------------|--|--|------|---|--------|-----------|--|--|--|---|--------|-----------|--|--|--|---|--------|-----------|
|                                        |  |  | Threemonths ended September 30, |   |        | Nine months endedSeptember 30, |
|                                        |  |  | 2006                            |   |        | 2005                           |  |  | 2006 |   |        | 2005      |
| Netearnings available to commonstockholders |  |  |                                 | $ | 23,732 |                           |  |  |      | $ | 24,009 |      |  |  |  | $ | 69,495 |      |  |  |  | $ | 975    |      |
| Weighted-averagebasic sharesoutstanding     |  |  |                                 |   | 43,314 |                           |  |  |      |   | 43,120 |      |  |  |  |   | 43,285 |      |  |  |  |   | 43,147 |      |
| Effectof dilutiveinstruments                |  |  |                                 |   |   |                           |  |  |      |   |   |      |  |  |  |   |   |      |  |  |  |   |   |      |
| Employeestockoptions                        |  |  |                                 |   | 49     |                           |  |  |      |   | 88     |      |  |  |  |   | 59     |      |  |  |  |   | 142    |      |
| Restrictedshareunits                        |  |  |                                 |   | 210    |                           |  |  |      |   | 508    |      |  |  |  |   | 275    |      |  |  |  |   | 508    |      |
| Warrants                                    |  |  |                                 |   | 768    |                           |  |  |      |   | 827    |      |  |  |  |   | 791    |      |  |  |  |   | 876    |      |
| Dilutivepotentialshares                     |  |  |                                 |   | 1,027  |                           |  |  |      |   | 1,423  |      |  |  |  |   | 1,125  |      |  |  |  |   | 1,526  |      |
| Weighted-averagedilutedshares               |  |  |                                 |   | 44,341 | (a)                       |  |  |      |   | 44,543 | (a)  |  |  |  |   | 44,410 | (a)  |  |  |  |   | 44,673 | (a)  |
| BasicEPS                                    |  |  |                                 | $ | 0.55   |                           |  |  |      | $ | 0.56   |      |  |  |  | $ | 1.61   |      |  |  |  | $ | 0.02   |      |
| DilutedEPS                                  |  |  |                                 | $ | 0.54   |                           |  |  |      | $ | 0.54   |      |  |  |  | $ | 1.56   |      |  |  |  | $ | 0.02   |      |
|                                             |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (a) | Forthe three months ended September  30,  2006 and 2005,securities of approximately 510  thousand shares and 259thousand shares, respectively, were excluded from the computation ofdiluted EPS because the effect was anti-dilutive for the periodspresented. For the nine months ended September  30,  2006and 2005, securities of approximately 611  thousand shares andzero shares, respectively, were excluded from the computation ofdiluted EPS because the effect was anti-dilutive for the periodspresented. |

16

----

Table of Contents

|          |                         |
|----------|-------------------------|
| 9.  | Stock BasedCompensation |

Effective January  1,  2006, theCompany adopted SFAS No. 123(R), Share-Based Payment using themodified prospective transition method. SFAS No. 123(R) requires themeasurement and recognition of compensation expense for all stock-basedpayment awards made to employees and directors including employee stockoptions and other forms of equity compensation based on estimated fairvalues.

Prior to the adoption of SFAS No. 123(R), the Companyused the fair value approach for recording stock-based employeecompensation in accordance with the fair value method prescribed bySFAS No. 123, Accounting for Stock-based Compensation, asamended by SFAS No. 148, Accounting for Stock Based Compensation– Transition and Disclosure. The approach to accounting forshare-based payments in SFAS No. 123(R) is similar to the approachdescribed in SFAS 123; therefore, there were no material changes madeto our recognition method upon adoption of SFAS No. 123(R). Under thefair value method, stock-based compensation expense had been recognizedin our results of operations in prior periods.

Compensationexpense is recognized based on the fair value of stock options,performance shares, restricted shares and restricted share units(‘‘RSU’’) as determined on the date ofgrant and is being expensed over the related vesting period. The fairvalue of the stock options granted is determined using theBlack-Scholes option-pricing model. Upon the adoption of SFAS No.123(R), the Company continues to apply the Black-Scholes option pricingmodel for determining the estimated fair value for stock awards as itdeems it to be the most appropriate model. The use of the Black-Scholesmodel requires certain estimates for values of variables used in themodel, as noted in the table that follows.

The fair value ofeach option grant is estimated on the date of grant using theBlack-Scholes option-pricing model. The weighted average fair value andassumptions used for options granted during the nine months endedSeptember  30,  2006 were:

|                                       |  |  |                                     |
|---------------------------------------|--|--|-------------------------------------|
|                                  |  |  | Ninemonths ended September 30, 2006 |
| Risk freeinterestrate                 |  |  | 5.16%                               |
| Volatility                            |  |  | 33.80%                              |
| Expecteddividend yield                |  |  | 0.00%                               |
| Expected optionlife                   |  |  | 7 years                             |
| Weighted average fair value ofoptions |  |  | $4.02                               |
|                                       |

The following table is asummary of stock option activity as of and for the nine months endedSeptember  30,  2006: 

|                                  |  |  |                  |  |          |                              |  |  |  |   |       |        |
|----------------------------------|--|--|------------------|--|----------|------------------------------|--|--|--|---|-------|--------|
|                             |  |  | September30,2006 |
|                             |  |  | Numberofshares   |  |          | Weightedaverageexerciseprice |
| Outstandingat December  31,2005  |  |  |                  |  | 710,860  |                         |  |  |  | $ | 10.43 |   |
| Granted                          |  |  |                  |  | 422,122  |                         |  |  |  | $ | 12.46 |   |
| Exercised                        |  |  |                  |  | (33,516  | )                       |  |  |  | $ | 9.17  |   |
| Forfeited                        |  |  |                  |  | (182,636 | )                       |  |  |  | $ | 12.18 |   |
| Outstandingat September  30,2006 |  |  |                  |  | 916,830  |                         |  |  |  | $ | 11.06 |   |
| Exercisable atSeptember  30,2006 |  |  |                  |  | 264,842  |                         |  |  |  | $ | 9.30  |   |
|                                  |

17

----

Table of Contents

The following table summarizes the statusof the Company’s stock options as of September  30,2006:

|                         |  |  |                          |  |         |                                        |  |  |                              |  |        |                |  |  |                              |   |       |        |  |  |  |  |         |        |  |  |  |   |       |        |
|-------------------------|--|--|--------------------------|--|---------|----------------------------------------|--|--|------------------------------|--|--------|----------------|--|--|------------------------------|---|-------|--------|--|--|--|--|---------|--------|--|--|--|---|-------|--------|
|                    |  |  | StockOptions Outstanding |  |         | StockOptionsExercisable                |
| Rangeof Exercise Prices |  |  | NumberofShares           |  |         | AverageRemainingContractualLife(Years) |  |  | WeightedAverageExercisePrice |  |        | NumberofShares |  |  | WeightedAverageExercisePrice |
| $0.00–$6.94       |  |  |                          |  | 148,125 |                                   |  |  |                              |  | 6.2    |           |  |  |                              | $ | 6.94  |   |  |  |  |  | 109,843 |   |  |  |  | $ | 6.94  |   |
| $6.95–$9.76       |  |  |                          |  | 209,999 |                                   |  |  |                              |  | 7.2    |           |  |  |                              | $ | 9.76  |   |  |  |  |  | 98,749  |   |  |  |  | $ | 9.76  |   |
| $9.77–$13.50      |  |  |                          |  | 558,706 |                                   |  |  |                              |  | 6.0    |           |  |  |                              | $ | 12.64 |   |  |  |  |  | 56,250  |   |  |  |  | $ | 13.10 |   |
| Total                   |  |  |                          |  | 916,830 |                                   |  |  |                              |  |   |           |  |  |                              | $ | 11.06 |   |  |  |  |  | 264,842 |   |  |  |  | $ | 9.30  |   |
|                         |

TheCompany recorded stock compensation expense of approximately$2.7  million and $2.1  million during the nine monthsended September  30,  2006 and 2005, respectively. Stockcompensation expense is included in compensation and employee benefitsin the consolidated statements of operations.

As ofSeptember  30,  2006, total unrecognized stock-basedcompensation expense related to nonvested stock awards wasapproximately $6.8  million. This expense is expected to berecognized over a weighted average period of 2.5years.

|           |                            |
|-----------|----------------------------|
| 10.  | Comprehensive Income(Loss) |

Comprehensive income (loss) for the three andnine months ended September  30,  2006 and 2005 is asfollows (inthousands):

|                                                                         |  |  |                                 |   |        |                               |  |  |      |   |         |         |  |  |  |   |        |        |  |  |  |   |         |         |
|-------------------------------------------------------------------------|--|--|---------------------------------|---|--------|-------------------------------|--|--|------|---|---------|---------|--|--|--|---|--------|--------|--|--|--|---|---------|---------|
|                                                                    |  |  | ThreeMonths Ended September 30, |   |        | Nine months endedSeptember30, |
|                                                                    |  |  | 2006                            |   |        | 2005                          |  |  | 2006 |   |         | 2005    |
| Netincome                                                               |  |  |                                 | $ | 23,732 |                          |  |  |      | $ | 24,009  |    |  |  |  | $ | 69,495 |   |  |  |  | $ | 975     |    |
| Foreigncurrency translationadjustments                                  |  |  |                                 |   | 46     |                          |  |  |      |   | — |    |  |  |  |   | 85     |   |  |  |  |   | — |    |
| Changein net unrealized gains (losses) on available-for-saleinvestments |  |  |                                 |   | 3,155  |                          |  |  |      |   | (2,675  | )  |  |  |  |   | 987    |   |  |  |  |   | (2,670  | )  |
| Totalcomprehensive income(loss)                                         |  |  |                                 | $ | 26,933 |                          |  |  |      | $ | 21,334  |    |  |  |  | $ | 70,567 |   |  |  |  | $ | (1,695  | )  |
|                                                                         |

18

----

Table of Contents

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

The followingis a discussion and analysis of our financial condition and results ofoperations. This discussion should be read in conjunction with ourconsolidated financial statements and accompanying notes which appearin the Company’s Annual Report on Form 10-K. It containsforward-looking statements that involve risks and uncertainties. Ouractual results could differ materially from those anticipated in theseforward-looking statements as a result of various factors, includingthose discussed below and in the Company’s Annual Report on Form10-K, particularly under Item 1A ‘‘RiskFactors’’ and the heading ‘‘Cautionary NoteRegarding Forward-Looking Statements.’’ Unless otherwiseindicated or the context requires otherwise, references to‘‘we,’’ ‘‘us,’’‘‘our’’,‘‘company,’’ or‘‘Primus’’ refer to the consolidatedoperations of Primus Guaranty, Ltd., or Primus Guaranty and referencesto a company name refer solely to such company.

BusinessOverview

We, through Primus Financial, one of our principalsubsidiaries, are primarily engaged in selling credit swaps againstinvestment grade credit obligations of corporate and sovereignreference entities. Credit swaps are derivative transactions thatobligate one party to the transaction (the‘‘Seller’’) to pay an amount to the otherparty to the transaction (the ‘‘Buyer’’)should an unrelated third party or portfolio of third parties (the‘‘Reference Entity’’) specified in thecontract incur one of a specified group of events(‘‘Credit Events’’). The amount to be paidby the Seller will either be (a) the notional amount of thetransaction, in exchange for which the Seller must be delivered adefined obligation of the Reference Entity (called physicalsettlement), or (b) the difference between the current market value ofa defined obligation of the Reference Entity and the notional amount ofthe transaction (called cash settlement). In exchange for taking therisk of the contract, the Seller will receive a fixed premium for theterm of the contract (or until the occurrence of a Credit Event). Weseek to minimize the risk inherent in our credit swap portfolio bymaintaining a high quality, broadly diversified credit swap portfolioacross Reference Entities, industries and countries. Primus Financialalso sells credit swaps referencing portfolios containing obligationsof multiple reference entities, which we call‘‘tranches’’. Primus Financial has thehighest counterparty credit ratings offered by S&P (AAA) andMoody’s (Aaa).

Primus Asset Management, our otherprincipal operating subsidiary, has an experienced team ofprofessionals who have expertise in credit analysis, investing, riskmanagement and market analysis. Primus Asset Management provides creditrisk investment advisory and asset management services to PrimusFinancial and unrelated third parties. For such services, Primus AssetManagement receives management fees.

Primus Re operates as afinancial guaranty insurance company, and generates revenue by charginga higher insurance premium for protection sold than the premium it paysfor the offsetting protection it purchases.

PRS Trading engagesin relative value trading and other strategies involving buying andselling of credit swaps and other financial instruments in pursuit offinancial returns. These trading strategies generally have a short-terminvestment horizon and are subject to tight risk controls and liquiditymanagement. PRS Trading commenced operations in January  2006.PRS Trading does not engage in trading activity with Primus Financial.PRS Trading has no rating from the rating agencies and, accordinglygenerally provides its swap counterparties with collateral to supportits contractual obligations. More recently, PRS Trading has enteredinto total return swaps and a loan warehouse financing arrangement.

Net Credit Swap Revenue 

Net credit swap revenue inour condensed consolidated statements of operations, comprises thepremiums earned and expensed on credit swaps, gains or losses realizedas a result of the termination of credit swaps and changes in the fairvalue of our credit swaps. Net credit swap revenue is earned by

19

----

Table of Contents

both Primus Financial and PRS Trading.Although both companies earn net credit swap revenue, the strategies ofthe two companies are different. Primus Financial generally sellscredit swaps in order to earn premium income over the term of thecontract, whereas PRS Trading engages in the active buying and sellingof credit swaps and generally will only hold positions for a limitedportion of the swap’s full tenor.

We receive premiumincome from the credit swaps we sell. In general, premiums are receivedquarterly in arrears and are accrued daily into income. In accordancewith U.S. GAAP, we carry our credit swaps on our condensed consolidatedstatements of financial condition at their fair value. Changes in thefair value of our credit swap portfolio are included as a component ofnet credit swap revenue in our condensed consolidated statements ofoperations. If a credit swap has an increase in fair value during aperiod, the increase will add to our net credit swap revenue for thatperiod. Conversely, if a credit swap has a decline in fair value duringthe period, the decline will subtract from our net credit swap revenuefor that period. Changes in the fair value of our credit swap portfolioare a function of the notional amount and composition of the portfolioand prevailing market credit swap premiums for comparable credit swaps.In our experience, considerable fluctuations may occur in the fairvalues of credit swaps from period to period and, as a result, thereader of our financial statements should not infer future results fromhistorical net credit swap revenues or losses.

In general, thefair values of individual credit swaps are aggregated by counterpartyfor presentation in our condensed consolidated statements of financialcondition. If the aggregate total of fair values for a counterparty isa net gain, the total is recorded as a component of unrealized gains oncredit swaps, at fair value, in our condensed consolidated statementsof financial condition. If the aggregate total of fair values for acounterparty is a net loss, the total is recorded as a component ofunrealized losses on credit swaps, at fair value, in our condensedconsolidated statements of financial condition. Aggregation bycounterparty is applied where an executed ISDA master agreement is inplace with the counterparty. In instances where we do not yet have anexecuted ISDA master agreement with the counterparty, the fair valuesof individual swap transactions are recorded as components ofunrealized gains or losses on credit swaps, at fair value, dependentupon whether the individual contract was at a gain or a loss. As ofSeptember  30,  2006, we had no outstanding credit swapswith any counterparties with whom we had not yet executed ISDA masteragreements.

As a general rule, when Primus Financial sellscredit swaps, it is our intention to maintain the transaction untilmaturity. However, there are two sets of circumstances in which wecould elect to terminate transactions prior to maturity, and we monitorour portfolio on a continuing basis to assess whether thosecircumstances are present.

First, whenever we receive newinformation suggesting that the credit quality of the underlying riskhas deteriorated to a material degree, we consider the possibility ofterminating the transaction, usually at a loss, to avoid a larger lossthat could result if the credit swap were to remain in place until acredit event occurs. The principal factor that governs our decisionregarding termination in these circumstances is whether we believe thatthe underlying risk has become substantially greater than the level ofrisk we would choose to assume in entering into a new sale of creditswaps. Since inception, we have terminated due to credit considerationsapproximately 1.2% of the notional amount of credit swapssold.

Second, we may elect to terminate a transaction forreasons other than credit considerations. Terminations of this type maygenerate gains or losses. In making a decision to terminate atransaction for reasons other than credit considerations, we consider anumber of different factors, including the absolute amount of theunrealized gain or loss we could realize, the likelihood of additionalgains or losses arising from the position, our view as to whether thecapital dedicated to the position could be profitably reallocated toother opportunities over a foreseeable horizon, the total size of ourportfolio in relation to our capital and the total size of our swappositions and exposures with a particular counterparty. We refer toterminations effected under these circumstances as‘‘resizing’’ or‘‘rebalancing’’. Since inception, we haveterminated approximately 10% of credit swaps under which we soldcredit swaps based on resizing or rebalancingconsiderations.

20

----

Table of Contents

We may terminate a credit swap in one oftwo ways. We may negotiate an agreed termination through the originalcounterparty (an unwind). We may negotiate an assignment and novationof our rights and obligations under the credit swap to a third party(an assignment). As an alternative to terminating a transaction, we mayenter into an equal and opposite transaction with a third party underwhich we purchase credit swaps on terms that match the terms of theoriginal transaction (an offset). In this last case, both sides of theposition may subsequently be unwound or assigned.

In the event ofan unwind or assignment, we pay or receive a cash settlement negotiatedwith the counterparty or assignee, based on the fair value of thecredit swap contract and the accrued premium on the swap contract atthe time of negotiation. The amounts we pay or receive are recorded asa realization of fair value and as a realization of accrued premiums inthe period in which the termination occurs.

In the past, PrimusFinancial purchased a limited amount of credit swaps as short-terminvestments, and incurred the cost of paying premiums until thepurchased swaps were terminated. Primus Financial undertook thesetransactions with the expectation that the market credit swap premiumlevel for the Reference Entity would rise subsequent to our purchase ofswaps and that we would be able to terminate the swap at a realized netgain. We did not achieve the results we expected from this strategy andwound down the portfolio to zero during the last quarter of2005.

PRS Trading both sold and purchased credit swaps during thenine months ended September  30,  2006 pursuant to itspredominantly relative value strategy.

Net Total ReturnSwap Revenue 

During the second quarter of 2006, theCompany’s subsidiary, PRS Trading entered into a masteragreement for total return swap transactions with a counterparty, whichexpires in May  2008. Under the terms of the agreement, PRSTrading receives interest and other payments based on certain mutuallyagreed reference loans, and pays a financing interest expense based onthe principal amount of such loans. PRS Trading takes the risk that thereferenced loans deteriorate in value and conversely receives thebenefit from any appreciation in the value of loans referenced in eachtotal return swap. The net fair value of each swap is determined by thenet fair value of the referenced loan. PRS Trading determines the fairvalue of the swaps based on the estimated cost to close-out the swappositions. PRS Trading places with the counterparty, initial margincash collateral and ongoing mark-to-market cash collateral, which isdetermined by the fair value of the total return swaps. The totalreturn swap with the counterparty is documented under an ISDA masteragreement between PRS Trading and the counterparty. The net fair valueof all total return swaps is netted with the fair values of any creditswaps outstanding between PRS Trading and the counterparty forpresentation in the condensed consolidated statements of financialcondition.

Deposit and Warehouse LoanAgreements

On July  13,  2006, theCompany's subsidiaries, Primus Asset Management and PRS Tradingentered into a credit agreement (together with certain other relatedagreements hereafter referred to as the ‘‘warehouse loanagreements’’) with a major financial institution and aspecial purpose entity (‘‘CLO’’), for thepurpose of building a portfolio of loan assets, with the expectation ofsubsequently issuing securities in the form of a collateralized loanobligation. Primus Asset Management will act as interim collateralmanager for the CLO. Under the warehouse loan agreements, the CLO isable to finance the purchase and accumulation of loans to an amount upto $400  million. In the interim period, while the CLOaccumulates the loans and before the securities are issued (the‘‘warehouse period’’), the major financialinstitution is funding the purchase of the loans. PRS Trading and themajor financial institution have agreed to share equally in any gainsor losses arising from the sale of loans during the warehouse period,although PRS Trading’s potential loss is limited to an amount of$4  million. PRS Trading has deposited $4  million in cashcollateral with a trustee pursuant to this arrangement. PRS Trading andthe major financial institution have agreed to share equally in the netinterest earned on the loans, after deduction of funding costs.

21

----

Table of Contents

Critical Accounting Policies

Valuation of Credit Swaps 

From the inception ofour business, we have applied Statement of Financial AccountingStandards, or SFAS, 133, Accounting for Derivative Instruments andHedging Activities, which established accounting and reportingstandards for derivative instruments. SFAS 133 requires recognition ofall credit swaps on the condensed consolidated statements of financialcondition at fair value.

The fair value of the credit swapsdepends on a number of factors, primarily the market level of creditswap premiums associated with individual Reference Entities. Creditswaps are valued using market-standard pricing models which calculatethe net present value of differences between future premiums oncurrently quoted market credit swaps and the contractual future creditswap premiums on contracts we have undertaken. Our pricing model hasbeen internally developed but is benchmarked against a market-standardmodel. Generally, our model uses quoted market credit swap premium datathat we purchase from an independent pricing service. This servicetakes pricing information from a number of prominent dealers andbrokers in the credit swap market across a range of standard maturitiesand restructuring terms, and creates average mid-market credit swappremium quotes on specific Reference Entities. We adjust the mid-marketpricing we receive from the pricing service to reflect an estimate ofthe cost to close the position.

We believe there are a variety offactors that may influence market credit swap premium levels. Theprincipal factor is the market’s view of the probability that aReference Entity will default over the multi-year horizon typical for acredit swap contract. Those views in turn are influenced by the stateof the economy, the outlook for corporate financial health in generalas well as the outlook for particular industries and companies.Additional factors include the magnitude of debt outstanding and debtpaying capacity within those same industries and companies. One factorspecific to the credit swap market is the capacity of credit swapmarket participants to sell credit swaps. If, for example, commercialbanks are actively buying protection to manage their regulatorycapital, this will tend, other factors being equal, to absorb thecapacity of protection sellers and cause an increase in market creditswap premiums. Conversely, creation of special purpose vehicles thatsell protection create additional protection seller capacity and,absent additional demand, can cause a decrease in market premiums.Absent rapid and steep changes, interest rates have, at most, a limitedeffect on market credit swap premium levels.

Stock-BasedEmployee Compensation Plans 

Effective January1,  2006, the Company adopted SFAS No. 123(R), Share-BasedPayment using the modified prospective transition method. SFAS No.123(R) requires the measurement and recognition of compensation expensefor all stock-based payment awards made to employees and directorsincluding employee stock options and other forms of equity compensationbased on estimated fair values.

Prior to the adoption of SFASNo. 123(R), the Company used the fair value approach for recordingstock-based employee compensation in accordance with the fair valuemethod prescribed by SFAS No. 123, Accounting for Stock-basedCompensation, as amended by SFAS No. 148, Accounting for StockBased Compensation – Transition and Disclosure. The approachto accounting for share-based payments in SFAS No. 123(R) is similar tothe approach described in SFAS 123, therefore, there were no materialchanges made to our recognition method upon adoption of SFAS No.123(R). Under the fair value method, stock-based compensation expensehad been recognized in our results of operations in priorperiods.

Compensation expense is recognized based on the fairvalue of stock options, performance shares, restricted shares andrestricted share units (‘‘RSU’’) asdetermined on the date of grant and is being expensed over the relatedvesting period. The fair value of the stock options granted isdetermined using the Black-Scholes option-pricing model. Upon theadoption of SFAS No. 123(R), the Company 

22

----

Table of Contents

continues to apply the Black-Scholes optionpricing model for determining the estimated fair value for stock awardsas it deems it to be the most appropriate model. The use of theBlack-Scholes model requires certain estimates for values of variablesused in the model.

Results of Operations

Threemonths ended September  30,  2006 compared with threemonths ended September  30,  2005

Overview

Our net income for the three months ended September30,  2006 was $23.7  million compared with $24.0million for the three months ended September  30,  2005.Net credit swap revenues were $28.9  million in the third quarterof 2006, compared with $27.4  million in the third quarter of2005. The improvement in net credit swap revenues were primarily theresult of an increase in net credit swap premiums partly offset bylower unrealized gains on our portfolio of credit swaps sold in thethird quarter of 2006, compared with the third quarter of 2005.

Interest income on our portfolio of investments was $7.1million in the third quarter of 2006, compared with $4.5  millionin the third quarter of 2005. The increase is due to higher marketinterest rates, together with increased invested balances, mainlyarising from the investment of the proceeds of the $125.0million debt issuance by Primus Financial in December  2005.

Interest expense and distributions on preferred stock issued byPrimus Financial were $4.3  million in the third quarter of 2006,compared with $1.7  million in the third quarter of 2005. Theincrease is due to higher market interest rates in 2006, together withthe interest expense associated with the $125.0  million debtissuance in December  2005.

Our operating expenses were$9.1  million in the third quarter of 2006, compared with$6.4  million in the third quarter of 2005, primarily due tohigher compensation and employee benefits as a result of increasedheadcount and higher professional fees, including employee recruitingcosts. Included in the third quarter of 2006, was a credit ofapproximately $500  thousand related to a reduction in stockcompensation expense as a result of employeedepartures.

Consolidated Net Credit SwapRevenue

Consolidated net credit swap revenue was$28.9  million and $27.4  million for the three monthsended September  30,  2006 and 2005, respectively. Netcredit swap revenue for Primus Financial excludes $72  thousandof net revenue earned on three credit swap transactions with itsaffiliate, Primus Re, as this amount is eliminated inconsolidation.

The table below shows the Company’sconsolidated net credit swap revenues, which are generated by PrimusFinancial and PRS Trading for the three months ended September30,  2006 and 2005 (inthousands):

|                                          |  |  |                                |   |        |         |  |  |  |   |         |        |
|------------------------------------------|--|--|--------------------------------|---|--------|---------|--|--|--|---|---------|--------|
|                                     |  |  | Threemonths ended September30, |
|                                     |  |  | 2006                           |   |        | 2005    |
| PrimusFinancial                          |  |  |                                | $ | 29,366 |    |  |  |  | $ | 27,449  |   |
| PRSTrading                               |  |  |                                |   | (461   | )  |  |  |  |   | — |   |
| Totalconsolidated net credit swaprevenue |  |  |                                | $ | 28,905 |    |  |  |  | $ | 27,449  |   |
|                                          |

Netcredit swap revenues are discussed separately below for PrimusFinancial and PRS Trading.

23

----

Table of Contents

Net Credit Swap Revenue –Primus Financial

Net credit swap revenue was $29.4million and $27.4  million for the three months endedSeptember  30,  2006 and 2005, respectively.

Net credit swap revenueincludes:

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

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

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

The table below shows the components ofnet credit swap revenue for the three months ended September30,  2006 and 2005 (inthousands):

|                                    |  |  |                                |   |        |         |  |  |  |   |        |         |
|------------------------------------|--|--|--------------------------------|---|--------|---------|--|--|--|---|--------|---------|
|                               |  |  | Threemonths ended September30, |
|                               |  |  | 2006                           |   |        | 2005    |
| Netpremiums earned                 |  |  |                                | $ | 18,129 |    |  |  |  | $ | 13,962 |    |
| Netrealized losses on creditswaps  |  |  |                                |   | (1,539 | )  |  |  |  |   | (1,248 | )  |
| Net unrealizedgains on creditswaps |  |  |                                |   | 12,776 |    |  |  |  |   | 14,735 |    |
| Totalnet credit swaprevenue        |  |  |                                | $ | 29,366 |    |  |  |  | $ | 27,449 |    |
|                                    |

NetPremiums Earned – Primus Financial

Net premiums earnedwere $18.1  million and $14.0  million for the three monthsended September  30,  2006 and 2005, respectively. Netpremiums earned include:

|  |              |                                     |
|--|--------------|-------------------------------------|
|  | •  | Premium incomeon credit swaps sold; |

|  |              |                                 |
|--|--------------|---------------------------------|
|  | •  | Premium income ontranches sold; |

|  |              |                                                                        |
|--|--------------|------------------------------------------------------------------------|
|  | •  | Premium expense on creditswaps purchased as short-term investments;and |

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

Thetable below shows the components of net premiums earned for the threemonths ended September  30,  2006 and 2005 (inthousands):

|                                                                                    |  |  |                                |   |         |        |  |  |  |   |        |         |
|------------------------------------------------------------------------------------|--|--|--------------------------------|---|---------|--------|--|--|--|---|--------|---------|
|                                                                               |  |  | Threemonths ended September30, |
|                                                                               |  |  | 2006                           |   |         | 2005   |
| Premiumincome on credit swapssold                                                  |  |  |                                | $ | 17,175  |   |  |  |  | $ | 14,177 |    |
| Premium incomeon tranches sold                                                     |  |  |                                |   | 954     |   |  |  |  |   | 114    |    |
| Premiumexpense on credit swaps purchased as short-terminvestments                  |  |  |                                |   | — |   |  |  |  |   | (308   | )  |
| Premiumexpense on credit swaps purchased to offset credit risk on certainswapssold |  |  |                                |   | — |   |  |  |  |   | (21    | )  |
| Totalnet premiumsearned                                                            |  |  |                                | $ | 18,129  |   |  |  |  | $ | 13,962 |    |
|                                                                                    |

Premiumincome on credit swaps sold was $17.2  million and $14.2million during the three months ended September  30,  2006and 2005, respectively. The increase was primarily as a result of theexpansion in our credit swap portfolio. The average notional amountsoutstanding of credit swaps sold were $15.2  billion and$13.0  billion for the three months ended September30,  2006 and 2005, respectively.

We began to sell creditswaps in tranche format during the second quarter of 2005, whereby wesell credit swaps referencing portfolios containing obligations ofmultiple reference entities. Premium income from the tranches sold was$954  thousand and $114  thousand for the three monthsended September  30,  2006 and 2005, respectively. Theaverage notional amount outstanding was $350.0  million and$50.0  million for the three months ended September30,  2006 and 2005, respectively.

24

----

Table of Contents

The portfolio of credit swaps purchasedfor short-term investment purposes was wound down to zero during 2005and there was no premium expense for swaps of this type in2006.

Net Realized Gains (Losses) on Credit Swaps –Primus Financial

Net realized gains (losses) for the threemonths ended September  30,  2006 and 2005 are summarizedbelow (inthousands):

|                                                                                               |  |  |                               |   |         |         |  |  |  |   |        |         |
|-----------------------------------------------------------------------------------------------|--|--|-------------------------------|---|---------|---------|--|--|--|---|--------|---------|
|                                                                                          |  |  | Threemonths endedSeptember30, |
|                                                                                          |  |  | 2006                          |   |         | 2005    |
| Realizedgains on terminated credit swapssold                                                  |  |  |                               | $ | 12      |    |  |  |  | $ | 201    |    |
| Realized losses onterminated credit swapssold                                                 |  |  |                               |   | (1,551  | )  |  |  |  |   | (1,264 | )  |
| Realized gainson terminated credit swaps purchased as short-terminvestments                   |  |  |                               |   | — |    |  |  |  |   | 15     |    |
| Realizedlosses on terminated credit swaps purchased as short-terminvestments                  |  |  |                               |   | — |    |  |  |  |   | (26    | )  |
| Realizedlosses on terminated credit swaps purchased to offset credit risk oncertain swapssold |  |  |                               |   | — |    |  |  |  |   | (174   | )  |
| Totalnet realized losses on creditswaps                                                       |  |  |                               | $ | (1,539  | )  |  |  |  | $ | (1,248 | )  |
|                                                                                               |

Weterminated $134.4  million and $106.2  million notionalamount of credit swaps sold during the three months endedSeptember  30,  2006 and 2005, respectively. We received$12  thousand and $201  thousand from the early terminationof swaps at a realized gain during the three months endedSeptember  30,  2006 and 2005, respectively, due toportfolio rebalancing. We incurred realized losses of $1.6million and $1.3  million during the three months endedSeptember  30,  2006 and 2005, respectively, due to theearly termination of swaps in order to mitigate credit risk.

During the third quarter of 2005, we terminated our position wherewe had purchased credit swaps to offset credit risk on certain swapssold and we realized a loss of $174  thousand.

NetUnrealized Gains (Losses) on Credit Swaps – PrimusFinancial

The unrealized gains (losses) on credit swaps soldand credit swaps purchased as short-term investments and for creditrisk offset purposes for the three months ended September30,  2006 and 2005 are summarized below (inthousands):

|                                                                                                |  |  |                                |   |         |        |  |  |  |   |        |         |
|------------------------------------------------------------------------------------------------|--|--|--------------------------------|---|---------|--------|--|--|--|---|--------|---------|
|                                                                                           |  |  | Threemonths ended September30, |
|                                                                                           |  |  | 2006                           |   |         | 2005   |
| Netunrealized gains on credit swapssold                                                        |  |  |                                | $ | 12,776  |   |  |  |  | $ | 15,047 |    |
| Net unrealizedlosses on credit swaps purchased as short-terminvestments                        |  |  |                                |   | — |   |  |  |  |   | (455   | )  |
| Netunrealized gains on credit swaps purchased to offset credit risk oncertain credit swapssold |  |  |                                |   | — |   |  |  |  |   | 143    |    |
| Totalnet unrealized gains on creditswaps                                                       |  |  |                                | $ | 12,776  |   |  |  |  | $ | 14,735 |    |
|                                                                                                |

Netunrealized gains on Primus Financial’s credit swaps were$12.8 million and $14.7  million for the three monthsended September  30,  2006 and 2005, respectively. Thechange in unrealized gains on credit swaps reflects the change in thefair value of our credit swap portfolio during these periods. Thesmaller unrealized gain on credit swaps for the three months endedSeptember  30,  2006 is primarily due to smaller decreasesin market credit swap premium levels compared to the comparable priorperiod.

25

----

Table of Contents

PRS TradingActivity

During the three months ended September30,  2006, PRS Trading recorded net trading losses of $72thousand; which comprised of net credit swap losses of $461thousand, net total return swap revenue of $313  thousand and netwarehouse loan revenue of $76  thousand. See below for a moredetailed discussion.

Net Credit Swap Revenue – PRSTrading

PRS Trading commenced operations in January2006 and therefore prior year comparison information is not available.In the third quarter of 2006, PRS Trading sold new credit swaps innotional principal of $113.4  million and purchased new creditswaps in notional principal of $84.2  million. Net credit swaprevenue (loss) for PRS Trading was ($461) thousand for the three monthsended September  30,  2006. Net credit swap revenueincludes:

|  |              |                              |
|--|--------------|------------------------------|
|  | •  | Net premium income(expense); |

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

|  |              |                                               |
|--|--------------|-----------------------------------------------|
|  | •  | Net unrealizedgains (losses) on credit swaps. |

The table below shows thecomponents of net credit swap revenue (loss) for the three months endedSeptember  30,  2006 (inthousands):

|                                      |  |  |                                       |   |      |         |
|--------------------------------------|--|--|---------------------------------------|---|------|---------|
|                                 |  |  | Threemonths ended September  30, 2006 |
| Netpremium expense                   |  |  |                                       | $ | (94  | )  |
| Net realized losses oncredit swaps   |  |  |                                       |   | (288 | )  |
| Net unrealized losses oncredit swaps |  |  |                                       |   | (79  | )  |
| Totalnet credit swap revenue(loss)   |  |  |                                       | $ | (461 | )  |
|                                      |

NetPremium Income (Expense) – PRS Trading

Net premiumexpense was $(94) thousand for the three months ended September30,  2006. Net premiums include premiums on credit swaps sold andpurchased. The table below shows the components of net premiums by PRSTrading for the three months ended September  30,  2006 (inthousands):

|                                         |  |  |                                      |   |      |         |
|-----------------------------------------|--|--|--------------------------------------|---|------|---------|
|                                    |  |  | Threemonths ended September 30, 2006 |
| Premium incomeon credit swaps sold      |  |  |                                      | $ | 214  |    |
| Premium expense oncredit swapspurchased |  |  |                                      |   | (308 | )  |
| Totalnet premiumexpense                 |  |  |                                      | $ | (94  | )  |
|                                         |

NetRealized Gains (Losses) on Credit Swaps – PRSTrading

Net realized gains (losses) for the three monthsended September  30,  2006 are summarized below (inthousands):

|                                                        |  |  |                                       |   |      |         |
|--------------------------------------------------------|--|--|---------------------------------------|---|------|---------|
|                                                   |  |  | Threemonths ended September  30, 2006 |
| Netrealized losses on terminated credit swapssold      |  |  |                                       | $ | (229 | )  |
| Net realized losses onterminated credit swapspurchased |  |  |                                       |   | (59  | )  |
| Totalnet realized losses on creditswaps                |  |  |                                       | $ | (288 | )  |
|                                                        |

Weterminated $54.2  million notional amount of credit swaps soldduring the three months ended September  30,  2006,resulting in net realized losses of $229  thousand. We terminated$34.5  million notional amount of credit swaps purchased duringthe three months ended September  30,  2006, resulting innet realized losses of $59  thousand.

26

----

Table of Contents

Net Unrealized Gains (Losses) onCredit Swaps – PRS Trading

The unrealized gains andlosses on credit swaps sold and purchased for the three months endedSeptember  30,  2006 are summarizedbelow:

|                                               |  |  |                                      |   |      |         |
|-----------------------------------------------|--|--|--------------------------------------|---|------|---------|
|                                          |  |  | Threemonths ended September 30, 2006 |
| Net unrealizedgains on credit swaps sold      |  |  |                                      | $ | 419  |    |
| Netunrealized losses on credit swapspurchased |  |  |                                      |   | (498 | )  |
| Netunrealized losses on creditswaps           |  |  |                                      | $ | (79  | )  |
|                                               |

Netunrealized losses on PRS Trading credit swaps were $79thousand for the three months ended September  30,2006. The change in unrealized losses on credit swaps reflects thechange in the fair value of our credit swap portfolio during theperiod. The fair value of the portfolio reflects the mid-market valuewith an adjustment for the estimated cost to close theposition.

Net Total Return Swap Revenue – PRSTrading

As previously discussed, we entered into a masteragreement for total return swap transactions with a counterparty in thesecond quarter of 2006. The total return swap is based on the returnson certain mutually agreed reference loans.

Net total returnswap revenue, as presented in the condensed consolidated statements ofoperations, comprises changes in the fair value of total return swaps,realized gains or losses on the termination of total return swaps andthe net interest earned on the total return swaps.

During thethree months ended September  30,  2006, net total returnswap revenue was $313  thousand. PRS Trading earned net interestof $253  thousand, realized a gain of $267  thousand on thetermination of total return swaps and recorded a net unrealized loss of$207  thousand under the total return swaps.

NetWarehouse Loan Revenue – PRS Trading

As previouslydiscussed, on July  13,  2006, we entered into warehouseloan agreements with a major financial institution.

Netwarehouse loan revenue, as presented in the condensed consolidatedstatements of operations, comprises of PRS Trading’s share underthe derivative transaction of net realized losses on the termination ofindividual loan positions and the net interest earned on the warehouseloans. During the three months ended September  30,  2006,net warehouse loan revenue was $76  thousand.

AssetManagement and Advisory Fees

We recognized $542thousand and $49  thousand of asset management and advisory feesfor the three months ended September  30,  2006 and 2005,respectively. During the third quarter of 2006, on behalf of an outsidethird party, we received an advisory fee of $400  thousand forthe arrangement of a credit swap tranche transaction. Some of our assetmanagement contracts also provide for the receipt of contingentperformance fees at maturity, none of which has been earned or accruedat September  30,  2006 or 2005,respectively.

Interest Income

We earned interestincome of $7.1  million and $4.5  million for the threemonths ended September  30,  2006 and 2005, respectively.The increase in interest income is attributable to higher averageinvested balances resulting from the December  2005 issuance of$125.0  million of subordinated debt by Primus Financial andretained cash earnings, together with higher yields on our investmentportfolio. The increase in yields is attributable to generallyincreasing market rates of interest during 2005 and 2006.

27

----

Table of Contents

Weighted average yields on the cashequivalents and available-for-sale investments were 4.40% in thethree months ended September  30,  2006 compared with3.64% for the three months ended September  30,2005.

The table below summarizes our interest income for thethree months ended September  30,  2006 and 2005 and ourtotal cash, cash equivalents and available-for-sale and tradinginvestments at September  30,  2006 and 2005, respectively(inthousands):

|                                                                           |  |  |                                |   |         |        |  |  |  |   |         |        |
|---------------------------------------------------------------------------|--|--|--------------------------------|---|---------|--------|--|--|--|---|---------|--------|
|                                                                      |  |  | Threemonths ended September30, |
|                                                                      |  |  | 2006                           |   |         | 2005   |
| Interestincome                                                            |  |  |                                | $ | 7,143   |   |  |  |  | $ | 4,483   |   |
| Cashand cashequivalents                                                   |  |  |                                | $ | 58,701  |   |  |  |  | $ | 80,951  |   |
| Available-for-saleand tradinginvestments                                  |  |  |                                |   | 601,189 |   |  |  |  |   | 416,597 |   |
| Totalcash, cash equivalents and available-for-sale and tradinginvestments |  |  |                                | $ | 659,890 |   |  |  |  | $ | 497,548 |   |
|                                                                           |

ForeignCurrency Revaluation

We transact credit swaps denominated inU.S. dollars and euros. Euro-denominated credit swaps comprised28% of the notional amount of our Primus Financial credit swapssold portfolio at September  30,  2006. Until the fourthquarter of 2005, net premiums received from swaps denominated in euroswere retained in euros. We now sell the majority of our euro premiumreceipts as they are received for U.S dollars, retaining only a smallworking cash balance in euros. We recorded a currency revaluation lossof $32  thousand and a currency revaluation gain of $55thousand on our holdings of euros, during the three months endedSeptember  30,  2006 and 2005, respectively.

Operating Expenses

Our operating expenses were$9.1 million and $6.4  million for the three months endingSeptember  30,  2006 and 2005, respectively, as summarizedbelow (in thousands):

|                                               |  |  |                               |   |       |        |  |  |  |   |       |        |
|-----------------------------------------------|--|--|-------------------------------|---|-------|--------|--|--|--|---|-------|--------|
|                                          |  |  | Threemonths endedSeptember30, |
|                                          |  |  | 2006                          |   |       | 2005   |
| Compensationand employeebenefits              |  |  |                               | $ | 5,023 |   |  |  |  | $ | 3,537 |   |
| Professionaland legalfees                     |  |  |                               |   | 1,361 |   |  |  |  |   | 981   |   |
| Depreciation andamortization                  |  |  |                               |   | 649   |   |  |  |  |   | 533   |   |
| Technology anddata                            |  |  |                               |   | 726   |   |  |  |  |   | 535   |   |
| Other                                         |  |  |                               |   | 1,302 |   |  |  |  |   | 805   |   |
| Totaloperatingexpenses                        |  |  |                               | $ | 9,061 |   |  |  |  | $ | 6,391 |   |
| Numberof full-time employees, at end ofperiod |  |  |                               |   | 46    |   |  |  |  |   | 33    |   |
|                                               |

Compensation expensefor the three months ended September  30,  2006 increasedapproximately $1.5  million over the comparable prior period.This increase was primarily the result of an increase in headcount aswe expand our business operations and higher performance basedincentives. Included in the third quarter of 2006, was a credit ofapproximately $500  thousand related to a reduction in stockcompensation expense as a result of employee departures. Our accruedcash incentive compensation expense was $2.1  million in thethird quarter of 2006, compared with an accrued expense of $1.3million for the third quarter of 2005. Stock compensation expense wasapproximately $0.6  million for both the three months endedSeptember  30,  2006 and 2005,respectively.

Professional and legal fees expense includes auditand tax advisor expenses, legal costs, employee recruiting costs anddirector and officer insurance expense. The increase in professionalfees is primarily related to higher employee recruiting costsassociated with the increase in headcount in the 

28

----

Table of Contents

third quarter of 2006. Depreciation andamortization principally relate to the depreciation of our computerequipment and furniture and fixtures, and the amortization of ourinternally developed software. The increase in depreciation andamortization expense is due to the increase in purchases of fixedassets and higher capitalized software costs. The increase intechnology and data expense was primarily attributable to the expansionof our technology platform to accommodate new trading strategiesassociated with our asset management build out. Other operatingexpenses include rent, bank fees, rating agency fees, brokerageexpense, travel and entertainment, exchange fees and otheradministrative expenses. The increase in other expenses was primarilydue to higher travel related costs and occupancy expenses associatedwith the additional office space in New York and in London.

Interest Expense and Preferred Distributions

For thethree months ended September  30,  2006 and 2005, weincurred $2.8  million and $649  thousand of interestexpense, respectively. The interest expense was incurred on the$75.0  million 30-year subordinated debt and the $125.0million of 15.5 year subordinated deferrable interest notes that wereissued by Primus Financial in July  2004 and December2005, respectively. The interest rate for the 30-year subordinated debtaveraged 5.47% and 2.57% for the three months endedSeptember  30,  2006 and 2005, respectively.

OnDecember  19,  2005, Primus Financial issued $125.0million of subordinated deferrable interest notes, which mature inJune  2021. The average interest rate on these notes was5.59% for the three months ended September  30,2006.

Primus Financial also made net distributions of$1.4  million and $1.0  million during the three monthsended September  30,  2006 and 2005, respectively, on thePrimus Financial Cumulative Preferred Stock issued in December2002. The average rate on these securities was 6.10% and4.29% during the three months ended September  30,2006 and 2005, respectively.

Income Taxes

Provision (benefit) for income taxes was $(14) thousand and$63  thousand for the three months ended September30,  2006 and 2005, respectively. Primus Guaranty had a netdeferred tax asset, fully offset by a valuation allowance, of$5.6  million and $4.8  million as of September30,  2006 and December  31,  2005, respectively. Thechange in the deferred tax asset and valuation allowance resultedprimarily from Primus Asset Management’s estimated net operatingloss. It is expected that only the income of Primus Asset Managementand its subsidiary, Primus Re, are likely to be subject to UnitedStates federal and local income taxes. However, were Primus Bermuda tobe subject to income tax, at a combined United States federal, New YorkState and New York City income tax rate of 46%, on its UnitedStates GAAP income, then its income tax expense (excluding interest andpenalties) would have been approximately $12.4  million and$10.5  million for the three months ended September30,  2006 and 2005, respectively. These figures assume thatPrimus Financial is not deemed to be making distributions to PrimusBermuda; such distributions would subject Primus Bermuda to anadditional United States federal branch profits tax.

Ninemonths ended September  30,  2006 compared with nine monthsended September  30,2005

Overview

On a U.S. GAAP basis, wereported net income of $69.5  million and $975  thousandfor the nine months ended September  30,  2006 and 2005,respectively. The increase in net income was primarily due to themark-to-market unrealized gains on credit swaps from the portfolio ofcredit swaps sold by Primus Financial in the 2006 period, compared withunrealized losses in the portfolio in the corresponding period of2005.

Consolidated Net Credit SwapRevenue

Consolidated net credit swap revenue was$85.9  million and $15.7  million for the nine months endedSeptember  30,  2006 and 2005, respectively. Net creditswap revenue for Primus Financial 

29

----

Table of Contents

excludes $233  thousand of net revenueearned on three credit swap transactions with its affiliate, Primus Re,as this amount is eliminated in consolidation.

The table belowshows the Company’s consolidated net credit swap revenues, whichare generated by Primus Financial and PRS Trading for the nine monthsended September  30,  2006 and 2005 (inthousands):

|                                          |  |  |                               |   |        |         |  |  |  |   |         |        |
|------------------------------------------|--|--|-------------------------------|---|--------|---------|--|--|--|---|---------|--------|
|                                     |  |  | Ninemonths ended September30, |
|                                     |  |  | 2006                          |   |        | 2005    |
| PrimusFinancial                          |  |  |                               | $ | 86,587 |    |  |  |  | $ | 15,672  |   |
| PRSTrading                               |  |  |                               |   | (722   | )  |  |  |  |   | — |   |
| Totalconsolidated net credit swaprevenue |  |  |                               | $ | 85,865 |    |  |  |  | $ | 15,672  |   |
|                                          |

Netcredit swap revenues are discussed separately below for PrimusFinancial and PRS Trading.

Net credit swap revenue –Primus Financial

Net credit swap revenue was $86.6million and $15.7  million for the nine months endedSeptember  30,  2006 and 2005, respectively.

Netcredit swap revenue includes:

|  |              |                     |
|--|--------------|---------------------|
|  | •  | Netpremiums earned; |

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

|  |              |                                               |
|--|--------------|-----------------------------------------------|
|  | •  | Netunrealized gains (losses) on credit swaps. |

The table below showsthe components of net credit swap revenue for the nine months endedSeptember  30,  2006 and 2005 (inthousands):

|                                             |  |  |                               |   |        |         |  |  |  |   |         |         |
|---------------------------------------------|--|--|-------------------------------|---|--------|---------|--|--|--|---|---------|---------|
|                                        |  |  | Ninemonths ended September30, |
|                                        |  |  | 2006                          |   |        | 2005    |
| Netpremiums earned                          |  |  |                               | $ | 51,143 |    |  |  |  | $ | 37,561  |    |
| Netrealized losses on creditswaps           |  |  |                               |   | (1,922 | )  |  |  |  |   | (3,052  | )  |
| Net unrealizedgains (losses) on creditswaps |  |  |                               |   | 37,366 |    |  |  |  |   | (18,837 | )  |
| Totalnet credit swaprevenue                 |  |  |                               | $ | 86,587 |    |  |  |  | $ | 15,672  |    |
|                                             |

Thecomponents of net credit swap revenue are discussed furtherbelow:

Net Premiums Earned – PrimusFinancial

Net premiums earned were $51.1  million and$37.6  million for the nine months ended September30,  2006 and 2005, respectively. Net premiums earnedinclude:

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

|  |              |                                 |
|--|--------------|---------------------------------|
|  | •  | Premium income on tranchessold; |

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

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

30

----

Table of Contents

The table below shows the components ofnet premiums earned for the nine months ended September30,  2006 and 2005 (inthousands):

|                                                                                    |  |  |                               |   |         |        |  |  |  |   |        |         |
|------------------------------------------------------------------------------------|--|--|-------------------------------|---|---------|--------|--|--|--|---|--------|---------|
|                                                                               |  |  | Ninemonths ended September30, |
|                                                                               |  |  | 2006                          |   |         | 2005   |
| Premiumincome on credit swapssold                                                  |  |  |                               | $ | 49,529  |   |  |  |  | $ | 38,458 |    |
| Premium incomeon tranches sold                                                     |  |  |                               |   | 1,614   |   |  |  |  |   | 210    |    |
| Premiumexpense on credit swaps purchased as short-terminvestments                  |  |  |                               |   | — |   |  |  |  |   | (1,040 | )  |
| Premiumexpense on credit swaps purchased to offset credit risk on certainswapssold |  |  |                               |   | — |   |  |  |  |   | (67    | )  |
| Totalnet premiumsearned                                                            |  |  |                               | $ | 51,143  |   |  |  |  | $ | 37,561 |    |
|                                                                                    |

Premiumincome on credit swaps sold was $49.5  million and $38.5million during the nine months ended September  30,  2006and 2005, respectively. The increase was primarily as a result of theexpansion in our credit swap portfolio. The average notional amountsoutstanding of credit swaps sold were $14.8  billion and$11.8  billion for the nine months ended September30,  2006 and 2005, respectively.

We began to sell creditswaps in tranche format during the second quarter of 2005, whereby wesell credit swaps referencing portfolios containing obligations ofmultiple reference entities. Premium income from the tranches sold was$1.6  million and $210  thousand for the nine months endedSeptember  30,  2006. The average notional amountoutstanding was $233.3  million and $33.3  million for thenine months ended September  30,  2006 and 2005,respectively.

The portfolio of credit swaps purchased forshort-term investment purposes was wound down to zero during 2005 andthere was no premium expense for swaps of this type in2006.

Net Realized Gains (Losses) on Credit Swaps –Primus Financial

Net realized gains (losses) for the ninemonths ended September  30,  2006 and 2005 are summarizedbelow (inthousands):

|                                                                                               |  |  |                               |   |         |         |  |  |  |   |        |         |
|-----------------------------------------------------------------------------------------------|--|--|-------------------------------|---|---------|---------|--|--|--|---|--------|---------|
|                                                                                          |  |  | Ninemonths ended September30, |
|                                                                                          |  |  | 2006                          |   |         | 2005    |
| Realizedgains on terminated credit swapssold                                                  |  |  |                               | $ | 625     |    |  |  |  | $ | 790    |    |
| Realized losses onterminated credit swapssold                                                 |  |  |                               |   | (2,547  | )  |  |  |  |   | (4,283 | )  |
| Realized gainson terminated credit swaps purchased as short-terminvestments                   |  |  |                               |   | — |    |  |  |  |   | 671    |    |
| Realizedlosses on terminated credit swaps purchased as short-terminvestments                  |  |  |                               |   | — |    |  |  |  |   | (56    | )  |
| Realizedlosses on terminated credit swaps purchased to offset credit risk oncertain swapssold |  |  |                               |   | — |    |  |  |  |   | (174   | )  |
| Totalnet realized losses on creditswaps                                                       |  |  |                               | $ | (1,922  | )  |  |  |  | $ | (3,052 | )  |
|                                                                                               |

Netrealized losses on the early termination of credit swaps sold were$1.9  million and $3.1  million for the nine months endedSeptember  30,  2006 and 2005, respectively We terminated$271.9  million and $356.3  million notional amount ofcredit swaps sold during the nine months ended September30,  2006 and 2005, respectively. We received $625thousand and $790  thousand from the early termination of swapsat a realized gain during the nine months ended September30,  2006 and 2005, respectively. We incurred realized losses of$2.5  million during the nine months ended September30,  2006 from the early termination of swaps in order tomitigate credit risk. We incurred $4.3  million of realizedlosses which was due to the mitigation of our credit risk during thenine months ended September  30,  2005.

31

----

Table of Contents

We terminated $123.0  millionnotional amount of credit swaps purchased during the nine months endedSeptember  30,  2005 resulting in a net realized gain of$615  thousand. During the course of 2005 we wound down ourportfolio of credit swaps purchased and, as a consequence, there wereno realized gains or losses on this portfolio in 2006.

During thethird quarter of 2005, we terminated our position where we hadpurchased credit swaps to offset credit risk on certain swaps sold andwe realized a loss of $174  thousand.

Net UnrealizedGains (Losses) on Credit Swaps – Primus Financial

Theunrealized gains (losses) on credit swaps sold and credit swapspurchased as short-term investments and for credit risk offset purposesfor the nine months ended September  30,  2006 and 2005 aresummarized below (inthousands):

|                                                                                                |  |  |                               |   |         |        |  |  |        |   |         |         |  |  |        |
|------------------------------------------------------------------------------------------------|--|--|-------------------------------|---|---------|--------|--|--|--------|---|---------|---------|--|--|--------|
|                                                                                           |  |  | Ninemonths ended September30, |   |         |   |
|                                                                                           |  |  | 2006                          |   |         | 2005   |  |  |   |
| Netunrealized gains (losses) on credit swapssold                                               |  |  |                               | $ | 37,366  |   |  |  |        | $ | (19,214 | )  |  |  |   |
| Netunrealized gains on credit swaps purchased as short-terminvestments                         |  |  |                               |   | — |   |  |  |        |   | 171     |    |  |  |   |
| Netunrealized gains on credit swaps purchased to offset credit risk oncertain credit swapssold |  |  |                               |   | — |   |  |  |        |   | 206     |    |  |  |   |
| Totalnet unrealized gains (losses) on creditswaps                                              |  |  |                               | $ | 37,366  |   |  |  |        | $ | (18,837 | )  |  |  |   |
|                                                                                                |

Netunrealized gains (losses) on Primus Financial’s credit swapswere $37.4 million and $(18.8) million for the nine months endedSeptember  30,  2006 and 2005, respectively. The change inunrealized gains (losses) on credit swaps reflects the change in thefair value of our credit swap portfolio during these periods. The gainduring the first nine months of 2006 on credit swaps sold is primarilyattributable to the increase in the fair value of the portfolio asmarket premiums fell during that period. Market premium levels atSeptember  30,  2005 were higher than those prevailing atDecember  31,  2004, which resulted in the unrealized lossin the nine months ended September  30,2005.

PRS Trading Activity

During thenine months ended September  30,  2006, PRS Tradingrecorded net trading losses of $209  thousand; which comprised ofnet credit swap losses of $722  thousand, net total return swaprevenue of $437  thousand and net warehouse loan revenue of$76  thousand. See below for a more detaileddiscussion.

Net Credit Swap Revenue – PRSTrading

PRS Trading commenced operations in January2006 and therefore prior year comparison information is not available.During the first nine months of 2006, PRS Trading sold new credit swapsin notional principal of $291.4  million of and purchased newcredit swaps in notional principal of $288.7  million. Net creditswap revenue (loss) for PRS Trading was $(722) thousand for the ninemonths ended September  30,  2006. Net credit swap revenue(loss) includes:

|  |              |                              |
|--|--------------|------------------------------|
|  | •  | Net premium income(expense); |

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

|  |              |                                               |
|--|--------------|-----------------------------------------------|
|  | •  | Net unrealizedgains (losses) on credit swaps. |

32

----

Table of Contents

The table below shows the components ofnet credit swap revenue (loss) for the nine months endedSeptember  30,  2006 (inthousands):

|                                     |  |  |                                     |   |      |         |
|-------------------------------------|--|--|-------------------------------------|---|------|---------|
|                                |  |  | Ninemonths endedSeptember  30, 2006 |
| Netpremium expense                  |  |  |                                     | $ | (62  | )  |
| Net realized losses oncredit swaps  |  |  |                                     |   | (176 | )  |
| Net unrealized losses oncreditswaps |  |  |                                     |   | (484 | )  |
| Total netcredit swap revenue(loss)  |  |  |                                     | $ | (722 | )  |
|                                     |

NetPremiums Earned – PRS Trading

Net premium expense was$62  thousand for the nine months ended September30,  2006. Net premiums include premiums on credit swaps sold andpurchased. The table below shows the components of net premiums by PRSTrading for the nine months ended September  30,  2006 (inthousands):

|                                         |  |  |                                     |   |      |         |
|-----------------------------------------|--|--|-------------------------------------|---|------|---------|
|                                    |  |  | Ninemonths ended September 30, 2006 |
| Premium incomeon credit swaps sold      |  |  |                                     | $ | 449  |    |
| Premium expense oncredit swapspurchased |  |  |                                     |   | (511 | )  |
| Totalnet premiumexpense                 |  |  |                                     | $ | (62  | )  |
|                                         |

NetRealized Gains (Losses) on Credit Swaps – PRSTrading

Net realized gains (losses) for the nine monthsended September  30,  2006 are summarized below (inthousands):

|                                                        |  |  |                                     |   |      |         |
|--------------------------------------------------------|--|--|-------------------------------------|---|------|---------|
|                                                   |  |  | Ninemonths ended September  30,2006 |
| Net realized losses on terminated creditswaps sold     |  |  |                                     | $ | (170 | )  |
| Net realized losses onterminated credit swapspurchased |  |  |                                     |   | (15  | )  |
| Realized gains on credit swapindex                     |  |  |                                     |   | 9    |    |
| Total netrealized losses on creditswaps                |  |  |                                     | $ | (176 | )  |
|                                                        |

Weterminated $103.7  million notional amount of credit swaps soldduring the nine months ended September  30,  2006,resulting in net realized losses of $170  thousand. We terminated$86.5  million notional amount of credit swaps purchased duringthe nine months ended September  30,  2006, resulting innet realized losses of $15  thousand.

Net UnrealizedGains (Losses) on Credit Swaps – PRS Trading

Theunrealized gains and losses on credit swaps sold and purchased for thenine months ended September  30,  2006 are summarizedbelow:

|                                               |  |  |                                     |   |      |         |
|-----------------------------------------------|--|--|-------------------------------------|---|------|---------|
|                                          |  |  | Ninemonths ended September 30, 2006 |
| Net unrealizedgains on credit swaps sold      |  |  |                                     | $ | 185  |    |
| Netunrealized losses on credit swapspurchased |  |  |                                     |   | (669 | )  |
| Netunrealized losses on creditswaps           |  |  |                                     | $ | (484 | )  |
|                                               |

Netunrealized losses on PRS Trading credit swaps were $484thousand for the nine months ended September  30,2006. The change in unrealized losses on credit swaps reflects thechange in the fair value of our credit swap portfolio during theperiod. The fair value of the portfolio reflects the mid-market valuewith an adjustment for the estimated cost to close the position.

33

----

Table of Contents

Net Total Return Swap Revenue –PRS Trading

As previously discussed, we entered into amaster agreement for total return swap transactions with a counterpartyin the second quarter of 2006. The total return swap is based on thereturns on certain mutually agreed reference loans.

Net totalreturn swap revenue, as presented in the condensed consolidatedstatements of operations, comprises changes in the fair value of totalreturn swap, realized gains or losses on the termination of totalreturn swaps and the net interest earned on the total returnswaps.

During the nine months ended September  30,2006, net total return swap revenue was $437  thousand. PRSTrading earned net interest of $283  thousand, realized a gain of$277  thousand on the termination of total return swaps andrecorded a net unrealized loss of $123  thousand under the totalreturn swap.

Net Warehouse Loan Revenue – PRSTrading

As previously discussed, on July  13,2006, we entered into warehouse loan agreements with a major financialinstitution.

Net warehouse loan revenue, as presented in thecondensed consolidated statements of operations, comprises of PRSTrading’s share under the derivative transaction of net realizedlosses on the termination of individual loan positions and the netinterest earned on the warehouse loans. During the nine months endedSeptember  30,  2006, net warehouse loan revenue was$76  thousand.

Asset Management and AdvisoryFees

During the second quarter of 2006, we closed on ourthird credit swap asset management transaction, in which we manage aportfolio of credit swaps on behalf of third parties in exchange formanagement fees. We recognized $709  thousand and $140thousand of asset management and advisory fees for the nine monthsended September  30,  2006 and 2005, respectively. Duringthe third quarter of 2006, on behalf of an outside third party, wereceived an advisory fee of $400  thousand for the arrangement ofa credit swap tranche transaction. Some of our asset managementcontracts also provide for the receipt of contingent performance feesat maturity, none of which has been earned or accrued atSeptember  30,  2006 or 2005,respectively.

Interest Income

We earned interestincome of $20.5  million and $11.0  million for the ninemonths ended September  30,  2006 and 2005, respectively.The increase in interest income is attributable to higher averageinvested balances resulting from the December  2005 issuance of$125.0  million of subordinated debt by Primus Financial andretained cash earnings, together with higher yields on our investmentportfolio. The increase in yields is attributable to generallyincreasing market rates of interest during 2005 and 2006.

Weighted average yields on the cash equivalents andavailable-for-sale investments were 4.29% during the nine monthsended September  30,  2006 compared with 2.99% forthe nine months ended September  30,  2005.

34

----

Table of Contents

The table below summarizes our interestincome for the nine months ended September  30,  2006 and2005 and our total cash, cash equivalents and available-for-sale andtrading investments at September  30,  2006 and 2005,respectively (inthousands):

|                                                                           |  |  |                               |   |         |        |  |  |  |   |         |        |
|---------------------------------------------------------------------------|--|--|-------------------------------|---|---------|--------|--|--|--|---|---------|--------|
|                                                                      |  |  | Ninemonths ended September30, |
|                                                                      |  |  | 2006                          |   |         | 2005   |
| Interestincome                                                            |  |  |                               | $ | 20,530  |   |  |  |  | $ | 10,969  |   |
| Cashand cashequivalents                                                   |  |  |                               | $ | 58,701  |   |  |  |  | $ | 80,951  |   |
| Available-for-saleand tradinginvestments                                  |  |  |                               |   | 601,189 |   |  |  |  |   | 416,597 |   |
| Totalcash, cash equivalents and available-for-sale and tradinginvestments |  |  |                               | $ | 659,890 |   |  |  |  | $ | 497,548 |   |
|                                                                           |

ForeignCurrency Revaluation

We transact credit swaps denominated inU.S. dollars and euros. Euro-denominated credit swaps comprised28% of the notional amount of our Primus Financial credit swapssold portfolio at September  30,  2006. Until the fourthquarter of 2005, net premiums received from swaps denominated in euroswere retained in euros. We now sell the majority of our euro premiumreceipts as they are received for U.S dollars, retaining only a smallworking cash balance in euros. During the nine months endedSeptember  30,  2005, the euro lost value against the U.S.dollar resulting in currency revaluation losses of $1.5  millionon our holdings of euro compared to a revaluation loss of $56thousand, on significantly reduced holdings of euros, for the ninemonths ended September  30,  2006.

OperatingExpenses

Our operating expenses were $26.2  millionand $20.1  million for the nine months ending September30,  2006 and 2005, respectively, as summarized below (inthousands):

|                                               |  |  |                               |   |        |        |  |  |  |   |        |        |
|-----------------------------------------------|--|--|-------------------------------|---|--------|--------|--|--|--|---|--------|--------|
|                                          |  |  | Ninemonths ended September30, |
|                                          |  |  | 2006                          |   |        | 2005   |
| Compensationand employeebenefits              |  |  |                               | $ | 15,517 |   |  |  |  | $ | 12,139 |   |
| Professionaland legalfees                     |  |  |                               |   | 3,645  |   |  |  |  |   | 2,731  |   |
| Depreciation andamortization                  |  |  |                               |   | 1,846  |   |  |  |  |   | 1,574  |   |
| Technologyanddata                             |  |  |                               |   | 1,546  |   |  |  |  |   | 1,250  |   |
| Other                                         |  |  |                               |   | 3,632  |   |  |  |  |   | 2,423  |   |
| Totaloperatingexpenses                        |  |  |                               | $ | 26,186 |   |  |  |  | $ | 20,117 |   |
| Numberof full-time employees, at end ofperiod |  |  |                               |   | 46     |   |  |  |  |   | 33     |   |
|                                               |

Compensation expensefor the nine months ended September  30,  2006 increased$3.4  million over the comparable prior period. Included in thenine months ended September  30,  2006, was a credit ofapproximately $500  thousand related to a reduction in stockcompensation expense as a result of employee departures. Compensationexpense for the nine months ended September  30,  2005included approximately $800  thousand related to the acceleratedcompensation expenses and accelerated vesting of stock related to thedeparture of former employees. This increase was primarily the resultof an increase in headcount as we expand our business operations andhigher performance based incentives. Our accrued cash incentivecompensation expense was $6.0  million for the nine months endedSeptember  30,  2006, compared with an accrued expense of$3.9  million in the corresponding period of 2005. Stockcompensation expense was approximately $2.7  million and$2.1  million for the nine months ended September30,  2006 and 2005, respectively.

The increase inprofessional fees is primarily related to increased provisions forlegal and audit fees and employee recruiting costs. The increase indepreciation and amortization expense is due to the increase inpurchases of fixed assets and higher capitalized software costs. Theincrease in 

35

----

Table of Contents

technology and data expense was primarilyattributable to the expansion of our technology platform to accommodatenew trading strategies associated with our asset management build out.The increase in other expenses was primarily due to travel relatedcosts and occupancy expenses associated with the additional officespace in New York and London.

Interest Expense and PreferredDistributions

For the nine months ended September30,  2006 and 2005, we incurred $7.9  million and$1.6  million of interest expense, respectively. The interestexpense was incurred on the $75.0  million 30-year subordinateddebt and the $125.0  million of 15.5 year subordinated deferrableinterest notes that were issued by Primus Financial in July  2004and December  2005, respectively. The interest rate for the30-year subordinated debt averaged 5.00% and 2.57% forthe nine months ended September  30,  2006 and 2005,respectively.

On December  19,  2005, PrimusFinancial issued $125.0  million of subordinated deferrableinterest notes, which mature in June  2021. The average interestrate on these notes was 5.35% during the nine months endedSeptember  30,  2006.

Primus Financial also made netdistributions of $4.2  million and $2.8  million during thenine months ended September  30,  2006 and 2005,respectively, on the Primus Financial Cumulative Preferred Stock issuedin December  2002. The average rate on these securities was5.60% and 3.77% during the nine months endedSeptember  30,  2006 and 2005,respectively.

Income Taxes

Provision for incometaxes was $41  thousand and $108  thousand for the ninemonths ended September  30,  2006 and 2005, respectively.Primus Guaranty had a net deferred tax asset, fully offset by avaluation allowance, of $5.6  million and $4.8  million asof September  30,  2006 and December  31,2005, respectively. The change in the deferred tax asset and valuationallowance resulted primarily from Primus Asset Management’sestimated net operating loss. It is expected that only the income ofPrimus Asset Management and its subsidiary, Primus Re, are likely to besubject to United States federal and local income taxes. However, werePrimus Bermuda to be subject to income tax, at a combined United Statesfederal, New York State and New York City income tax rate of46%, on its United States GAAP income, then its income taxexpense (excluding interest and penalties) would have beenapproximately $36.2  million and approximately $1.1million for the nine months ended September  30,  2006 and2005, respectively. These figures assume that Primus Financial is notdeemed to be making distributions to Primus Bermuda; such distributionswould subject Primus Bermuda to an additional United States federalbranch profits tax.

Contractual Obligations

Thefollowing table summarizes our contractual obligations atSeptember  30,  2006 and the effect that those obligationsare expected to have on our liquidity and cash flows in future periods(in thousands):

|                                      |  |  |                     |   |         |                |  |  |           |   |         |                 |  |  |                  |   |         |                 |  |  |  |   |         |                 |  |  |  |   |         |        |
|--------------------------------------|--|--|---------------------|---|---------|----------------|--|--|-----------|---|---------|-----------------|--|--|------------------|---|---------|-----------------|--|--|--|---|---------|-----------------|--|--|--|---|---------|--------|
|                                 |  |  | Paymentdue byperiod |
|                                 |  |  | Total               |   |         | Lessthan1 year |  |  | 1-3 years |   |         | 3-5 years       |  |  | Morethan 5 years |
| Propertyleases                       |  |  |                     | $ | 9,160   |           |  |  |           | $ | 1,252   |            |  |  |                  | $ | 2,679   |            |  |  |  | $ | 2,732   |            |  |  |  | $ | 2,497   |   |
| Subordinated deferrableinterestnotes |  |  |                     |   | 200,000 |           |  |  |           |   | — |  (a)  |  |  |                  |   | — |  (a)  |  |  |  |   | — |  (a)  |  |  |  |   | 200,000 |   |
| Total                                |  |  |                     | $ | 209,160 |           |  |  |           | $ | 1,252   |            |  |  |                  | $ | 2,679   |            |  |  |  | $ | 2,732   |            |  |  |  | $ | 202,497 |   |
|                                      |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                              |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------|
| (a) | Payments on thesubordinated deferrable interest notes for the next five years cannotbe determined, as the notes are auction rateobligations. |

36

----

Table of Contents

Property lease:    PrimusFinancial has leased its premises at 360 Madison Avenue, New York, NewYork from Madison 45 LLC at a fixed yearly rental (subject to certainescalations specified in the lease) until August  1,  2012.We have agreed to an amendment to the lease that extends its term to2016 and adds approximately 5,500 square feet of additional space. Inaddition, in 2006, we leased approximately 2,900 square feet of officespace in London under a lease that expires in 2012. There are nomaterial restrictions imposed by our lease agreements and the leasesare categorized as operating leases.

We have no other materiallong-term contractual obligations.

Liquidity and CapitalResources

Capital Strategy

Primus Financial, inorder to support its AAA/Aaa ratings, is required to maintain capitalin an amount determined by the capital models it has agreed upon withS&P and Moody’s. The capital required is primarily afunction of Primus Financial’s credit swap portfoliocharacteristics, operating expenses and tax position. Retained cashflow and proceeds from financings are utilized to increase our capitalresources to support our credit swap business.

We receive cashfrom the receipt of credit swap premiums, realized gains from the earlytermination of credit swaps, interest income earned on our investmentportfolio and capital raising activities. Cash is used to pay ouroperating expenses, administrative expenses, premiums on credit swapswe have purchased, realized losses from the early termination of creditswaps, interest on debt and preferred share distributions. Our cash,cash equivalents and available-for-sale and trading investments were$659.9  million and $629.5 million as of September30,  2006 and December  31,  2005,respectively.

Cash Flows

Cash flows fromoperating activities   –   Net cash provided byoperating activities were $32.5  million and $23.6  millionfor the nine months ended September  30,  2006 and 2005,respectively. This increase is primarily attributable to higher premiumincome on a larger credit swap portfolio during 2006 compared with2005, as a result of the continued growth of our credit swapportfolio.

Cash flows from investingactivities   –   Net cash used in investingactivities were $38.8  million and $258.7  million for thenine months ended September  30,  2006 and 2005,respectively. The decrease was primarily due to reduced purchases ofavailable-for-sale-investments in 2006 compared with 2005 andsecurities maturing in 2006.

Cash flows from financingactivities   –   Net cash used in financingactivities were $4.4  million and $5.0  million for thenine months ended September  30,  2006 and 2005,respectively. This decrease is primarily due to lower repurchase andretirement of our common stock, partly offset by an increase inpreferred distributions of our subsidiary during 2006 compared with2005.

With our current capital resources and anticipated futurecredit swap premium receipts and interest income, we believe we havesufficient liquidity to pay our operating expenses and preferreddistributions over at least the next twelve months.

RecentAccounting Pronouncements 

In December  2004, theFinancial Accounting Standards Board(‘‘FASB’’) issued SFAS No.123(R), Share-Based Payment. SFAS No. 123(R) is a revision ofSFAS No. 123 and supersedes Accounting Principles Board(‘‘APB’’) Opinion No. 25, Accounting forStock Issued to Employees, and amends SFAS No. 95, Statement ofCash Flows. SFAS No. 123(R) eliminates the ability to account forshare-based compensation transactions using APB Opinion No. 25 andrequires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the financial statementsusing a fair value-based method. In April  2005, the Securitiesand Exchange Commission 

37

----

Table of Contents

(‘‘SEC’’)amended the effective date of SFAS No. 123(R) until the first fiscalyear beginning after June  15,  2005 to provide additionaltime for companies to comply with the reporting requirements. EffectiveJanuary  1,  2006, the Company adopted SFAS No. 123 (R).See note 9 of notes to condensed consolidated financial statements forfurther detail.

In March  2005, the SEC staff issued StaffAccounting Bulletin No. 107 (‘‘SAB No.107’’) to provide supplemental implementation guidance onSFAS No. 123(R). The Company applied the relevant provisions of SAB No.107 in its adoption of SFAS No. 123(R).

In May  2005, theFASB issued SFAS 154, Accounting Changes and Error Corrections– a replacement of APB Opinion No. 20 and FASB Statement No.3. This statement requires retrospective application to priorperiods’ financial statements of changes in accountingprinciple. SFAS 154 is effective for accounting changes and correctionsof errors made in fiscal years beginning after December15,  2005. The Company will apply SFAS 154 in future periods, ifapplicable.

In November  2005, the FASB issued FASB StaffPosition FSP 115-1, The Meaning of Other-Than Temporary Impairmentand Its Application to Certain Investments (FSP 115-1), whichaddresses the determination as to when an investment is consideredimpaired, whether that impairment is other-than-temporary, and themeasurement of an impairment loss. FSP 115-1 also includes accountingconsiderations subsequent to the recognition of an other-than-temporaryimpairment and requires certain disclosures about unrealized lossesthat have not been recognized as other-than-temporary impairments. Theguidance in FSP 115-1 is required to be applied to reporting periodsbeginning after December 15, 2005. The adoption did not have anyeffect on the condensed consolidated financial statements.

InJune  2006, the FASB issued Interpretation No. 48, Accountingfor Uncertainty in Income Taxes-an interpretation of FASB Statement No.109 (FIN 48). FIN 48 prescribes a recognition threshold andmeasurement attributes for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a taxreturn. FIN 48 also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition. FIN 48 is effective for fiscal years beginning afterDecember  15,  2006. The Company is currently evaluatingthe impact that adoption of FIN 48 will have on its consolidatedfinancial statements.

In September  2006, the FASB issuedSFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS 157defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles (GAAP), and expandsdisclosures about fair value measurements. SFAS No. 157 is effectivefor fiscal years beginning after November  15,  2007. TheCompany is currently evaluating the impact that adoption of SFAS No.157 will have on its consolidated financialstatements.

Cautionary Note Regarding Forward-LookingStatements

This quarterly report of Primus Guaranty includesstatements that are not historical or current facts and are‘‘forward-looking statements’’ madepursuant to the safe harbor provisions of the Private SecuritiesLitigation Reform Act of 1995. The words‘‘believe,’’‘‘anticipate,’’‘‘project,’’‘‘plan,’’‘‘expect,’’‘‘intend,’’ ‘‘will likelyresult,’’ ‘‘looking forward’’or ‘‘will continue,’’ and similarexpressions identify forward-looking statements. These statements aresubject to certain risks and uncertainties that could cause actualresults to differ materially from historical earnings and thosepresently anticipated or projected. Primus Guaranty cautions readersnot to place undue reliance on any such forward-looking statements,which speak only to their respective dates. The following are some ofthe factors that could affect financial performance or could causeactual results to differ materially from estimates contained in orunderlying the Company’s forward-looking statements:

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

|  |              |                                                                            |
|--|--------------|----------------------------------------------------------------------------|
|  | •  | the level of activitywithin the national and international credit markets; |

|  |              |                                           |
|--|--------------|-------------------------------------------|
|  | •  | competitive conditions and pricinglevels; |

|  |              |                                         |
|--|--------------|-----------------------------------------|
|  | •  | legislative and regulatorydevelopments; |

38

----

Table of Contents

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

|  |              |                      |
|--|--------------|----------------------|
|  | •  | changes in tax laws; |

|  |              |                                                                                                        |
|--|--------------|--------------------------------------------------------------------------------------------------------|
|  | •  | changes in international or nationalpolitical or economic conditions, including any terrorist attacks; |

|  |              |                                                          |
|--|--------------|----------------------------------------------------------|
|  | •  | uncertainties that have not been identifiedat this time. |

The Company undertakes no obligation to publiclycorrect or update any forward-looking statement if it later becomesaware that such results are not likely to beachieved.

39

----

Table of Contents

|              |                                                           |
|--------------|-----------------------------------------------------------|
| Item3.  | Quantitative and Qualitative Disclosures aboutMarket Risk |

Market risk represents the potential for gains orlosses that may result from changes in the value of a financialinstrument as a consequence of changes in market conditions. Ourprimary market risk is changes in market credit swap premium levels,which increase or decrease the fair value of our credit swap portfolio.Market credit swap premium levels change as a result of specific eventsor news related to a Reference Entity, such as a change in a creditrating by any of the rating agencies. Additionally, market credit swappremium levels can vary as a result of changes in market sentiment. Asa general matter, given our strategy of holding credit swaps sold untilmaturity, we do not seek to manage our overall exposure to marketcredit swap premium levels, and we expect fluctuations in the fairvalue of our credit swap portfolio as a result of these changes. As ofSeptember  30,  2006, each one basis point increase ordecrease in market credit swap premiums would decrease or increase thefair value of our credit swap portfolio by approximately $5.4million. We face other market risks, which are likely to have a lesserimpact upon our net income than those associated with market creditswap premium level risk. These other risks include interest rate riskassociated with market interest rate movements. These movements mayaffect the value of our credit swap portfolio as our pricing modelincludes an interest rate component, which is used to discount futureexpected cash flows. Interest rate movements may also affect thecarrying value of and yield on our investments. The Primus FinancialCumulative Preferred Stock pays distributions that are based upon theauction rate preferred market. A difference between the rates we pay inthe auction rate preferred market and the interest rates we receive onour investments may result in an additional cost to our company.Assuming that auction results with respect to the Primus FinancialCumulative Preferred Stock reflect prevailing short-term interestrates, each 25 basis point increase or decrease in the level of thoserates would increase or decrease Primus Financial’s annualdistribution cost by approximately $125,000 for each of the Series Aand Series B MMP Receipts, but would not affect distributions on theSeries B MMP Receipts as the interest and auction rate for such MMPReceipts were set for a one year period on January  20,2006. In addition, interest rate movements may increase or decrease theinterest expense we incur on our $200  million of subordinateddeferrable interest notes. A 25 basis point increase in the level ofthose rates would increase Primus Financial’s interest expenseby $500,000 annually; however, at December  31,  2005, theinterest rate on the $50  million Series B subordinateddeferrable interest notes was set for a one year period.

Counterparty risk represents the potential for loss should one ormore of our counterparties be unable to meet its obligations due tobankruptcy or a similar event, which could adversely affect our resultsof operations. Our counterparties generally have investment gradecredit ratings. At September  30,  2006, the notional andfair value amount of credit swaps outstanding with respect to onenon-rated counterparty were $5.0  million and $17thousand, respectively. The premiums on these transactions were fullyprepaid by the counterparty, and as such, they have been categorized asAAA/Aaa rating in our credit swap portfolio.

|              |                         |
|--------------|-------------------------|
| Item4.  | Controls and Procedures |

The company hascarried out an evaluation, under the supervision and with theparticipation of the company’s management, including the ChiefExecutive Officer and Chief Financial Officer, of the effectiveness ofdisclosure controls and procedures pursuant to rules 13a-15 and 15-15dpromulgated under the Securities and Exchange Act of 1934 as of the endof the period covered by this report. Based on that evaluation, theChief Executive Officer and the Chief Financial Officer concluded thatthe disclosure controls and procedures are effective to providereasonable assurance that all material information relating to thecompany required to be filed in this report have been made known tothem in a timely fashion. There have been no changes in internalcontrol over financial reporting that occurred during the most recentfiscal quarter that have materially affected, or are reasonably likelyto affect, internal control over financial reporting.

Thecompany’s management, including the Chief Executive Officer andthe Chief Financial Officer, does not expect that the company’sdisclosure controls or its internal controls can prevent all errors andall fraud. Further, the design of a control system must reflect thefact that there are resource constraints, and the benefits of controlsmust be considered relative to their costs. As a result 

40

----

Table of Contents

of the inherent limitations in all controlsystems, no evaluation of controls can provide absolute assurance thatall control issues and instances of fraud, if any, within the companyhave been detected. These inherent limitations include the realitiesthat judgments in decision-making are faulty, and that breakdowns canoccur because of simple error or mistake. As a result of the inherentlimitations in a cost-effective control system, misstatements due toerror or fraud may occur and not be detected. Accordingly, thecompany’s disclosure controls and procedures are designed toprovide reasonable, not absolute, assurance that the disclosurecontrols and procedures are met.

Part II.    OtherInformation

|               |                  |
|---------------|------------------|
| Item 1.  | LegalProceedings |

In the ordinary course of operating our business, wemay encounter a significant risk of litigation from time to time.However, we are not party to or currently aware of any material pendinglitigation.

Item 1A.    Risk Factors

There have notbeen any material changes from the risk factors previously disclosed inour Annual Report on Form 10-K for the year ended December31,  2005.

|               |                                                            |
|---------------|------------------------------------------------------------|
| Item 2.  | Unregistered Salesof Equity Securities and Use of Proceeds |

None.

|              |                                |
|--------------|--------------------------------|
| Item3.  | Defaults upon SeniorSecurities |

None.

|               |                                                    |
|---------------|----------------------------------------------------|
| Item 4.  | Submissionof Matters to a Vote of Security Holders |

None.

|              |                   |
|--------------|-------------------|
| Item5.  | Other Information |

None.

|              |          |
|--------------|----------|
| Item6.  | Exhibits |

|                                  |                                                                                     |
|----------------------------------|-------------------------------------------------------------------------------------|
|     12  | Ratio of Earnings to CombinedFixed Charges and Preferred Share DividendRequirements |

|                                    |                                                                                                 |
|------------------------------------|-------------------------------------------------------------------------------------------------|
|     31.1  | Certificationof Chief Executive Officer pursuant to Section 302 of theSarbanes-Oxley Act of2002 |

|                                    |                                                                                                  |
|------------------------------------|--------------------------------------------------------------------------------------------------|
|     31.2  | Certification of ChiefFinancial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002 |

|                                  |                                                                                                                                                                   |
|----------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     32  | Certification of ChiefExecutive Officer and Chief Financial Officer pursuant to 18 U.S.C.Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of2002 |

41

----

Table of Contents

SIGNATURES

Pursuantto the requirements of the Securities Exchange Act of 1934, theRegistrant has duly caused this Report to be signed on its behalf bythe undersigned, thereunto dulyauthorized.

|                                                                                               |
|-----------------------------------------------------------------------------------------------|
| PRIMUS GUARANTY, LTD.                                                                         |
| /s/ RichardClaiden                                                                            |
| Richard ClaidenChief FinancialOfficer(Duly Authorized Officer and Principal FinancialOfficer) |
|                                                                                               |

Date: November 8,2006

42

----