##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2010
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to  .
 Commission File Number: 001-32307
 
 Primus Guaranty, Ltd.
  Bermuda
    
    98-0402357(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 Clarendon House
2 Church Street
Hamilton HM 11, Bermuda
 441-296-0519
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



Primus Guaranty, Ltd.
 Form 10-Q
  INDEX
 Part I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Statements of Financial Condition (Unaudited) as of September 30, 2010 and December 31, 2009
    
    
    3Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2010 and 2009
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2010 and 2009
    
    
    5Condensed Consolidated Statements of Equity (Deficit) (Unaudited) for the nine months ended September 30, 2010 and year ended December 31, 2009
    
    
    6Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    31Cautionary Statement Regarding Forward Looking Information
    
    
    52Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    53Item 4. Controls and Procedures
    
    
    54Part II. Other InformationItem 1. Legal Proceedings
    
    
    54Item 1A. Risk Factors
    
    
    54Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    55Item 6. Exhibits
    
    
    55Signatures
    
    
    56Exhibit 10.1Exhibit 10.2Exhibit 10.3Exhibit 10.4Exhibit 12Exhibit 31.1Exhibit 31.2Exhibit 32
   2




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##### Table of Contents



Part I. Financial Information
 
  Primus Guaranty, Ltd.
 
 Condensed Consolidated Statements of Financial Condition

(Unaudited)
 (in thousands except share amounts)
 September 30,
    
    
    December 31,2010
    
    
    2009AssetsCash and cash equivalents
    
    $
    132,674
    
    
    $
    299,514Investments (includes $365,770 and $274,275 at fair value)
    
    
    365,940
    
    
    
    274,444Restricted cash and investments
    
    
    131,469
    
    
    
    127,116CLO cash and cash equivalents
    
    
    133,970
    
    
    
    CLO loans and securities, at fair value
    
    
    2,479,970
    
    
    
    CLO other assets
    
    
    20,287
    
    
    
    Accrued interest and premiums
    
    
    7,181
    
    
    
    6,163Unrealized gain on credit swaps, at fair value
    
    
    233
    
    
    
    2,207Goodwill and other intangible assets, net
    
    
    7,560
    
    
    
    8,017Other assets
    
    
    14,573
    
    
    
    15,286Total assets
    
    $
    3,293,857
    
    
    $
    732,747Liabilities and Equity (deficit)LiabilitiesAccounts payable and accrued expenses
    
    $
    5,123
    
    
    $
    7,855Unrealized loss on credit swaps, at fair value
    
    
    526,567
    
    
    
    691,905Payable for credit events
    
    
    4,038
    
    
    
    28,596CLO notes, at fair value
    
    
    2,348,223
    
    
    
    CLO other liabilities
    
    
    67,056
    
    
    
    Long-term debt
    
    
    223,433
    
    
    
    244,051Other liabilities
    
    
    34,841
    
    
    
    9,787Total liabilities
    
    
    3,209,281
    
    
    
    982,194Commitments and contingenciesEquity (deficit)Common shares, $0.08 par value, 62,500,000 shares
authorized, 37,563,002 and 38,267,546 shares issued and
outstanding at September 30, 2010 and December 31, 2009
    
    
    3,005
    
    
    
    3,061Additional paid-in capital
    
    
    277,423
    
    
    
    280,685Accumulated other comprehensive income
    
    
    6,684
    
    
    
    2,148Retained earnings (deficit)
    
    
    (500,401
    )
    
    
    (628,443
    )Appropriated retained earnings from CLO consolidation
    
    
    204,763
    
    
    
    Total shareholders equity (deficit) of Primus
Guaranty, Ltd.
    
    
    (8,526
    )
    
    
    (342,549
    )Preferred securities of subsidiary
    
    
    93,102
    
    
    
    93,102Total equity (deficit)
    
    
    84,576
    
    
    
    (249,447
    )Total liabilities and equity (deficit)
    
    $
    3,293,857
    
    
    $
    732,747
 See accompanying notes.
  3




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##### Table of Contents



Primus Guaranty, Ltd.
 
 Condensed Consolidated Statements of Operations

(Unaudited)
 (in thousands except per share amounts)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009RevenuesNet credit swap revenue
    
    $
    227,547
    
    
    $
    471,835
    
    
    $
    125,369
    
    
    $
    1,154,599Net CLO loss
    
    
    (30,000
    )
    
    
    
    
    
    
    (77,249
    )
    
    
    CLO interest income
    
    
    22,859
    
    
    
    
    
    
    
    65,791
    
    
    
    Asset management and advisory fees
    
    
    115
    
    
    
    1,270
    
    
    
    669
    
    
    
    2,076Interest income
    
    
    3,675
    
    
    
    1,218
    
    
    
    9,916
    
    
    
    4,716Gain on retirement of long-term debt
    
    
    752
    
    
    
    643
    
    
    
    8,185
    
    
    
    39,591Impairment loss on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (761
    )Other income
    
    
    2,453
    
    
    
    548
    
    
    
    2,299
    
    
    
    3,022Total revenues
    
    
    227,401
    
    
    
    475,514
    
    
    
    134,980
    
    
    
    1,203,243ExpensesCLO interest expense
    
    
    9,823
    
    
    
    
    
    
    
    23,918
    
    
    
    CLO other expenses
    
    
    1,920
    
    
    
    
    
    
    
    5,212
    
    
    
    Compensation and employee benefits
    
    
    5,080
    
    
    
    6,418
    
    
    
    16,271
    
    
    
    15,699Professional and legal fees
    
    
    1,928
    
    
    
    2,253
    
    
    
    5,875
    
    
    
    5,631Interest expense
    
    
    1,760
    
    
    
    2,026
    
    
    
    5,366
    
    
    
    7,094Other
    
    
    1,412
    
    
    
    2,543
    
    
    
    9,538
    
    
    
    6,648Total expenses
    
    
    21,923
    
    
    
    13,240
    
    
    
    66,180
    
    
    
    35,072Income before provision for income taxes
    
    
    205,478
    
    
    
    462,274
    
    
    
    68,800
    
    
    
    1,168,171Provision for income taxes
    
    
    74
    
    
    
    5
    
    
    
    77
    
    
    
    152Net income
    
    
    205,404
    
    
    
    462,269
    
    
    
    68,723
    
    
    
    1,168,019Distributions on preferred securities of subsidiary
    
    
    732
    
    
    
    726
    
    
    
    2,444
    
    
    
    2,740Net loss attributable to non-parent interests in
CLOs
    
    
    (24,355
    )
    
    
    
    
    
    
    (60,876
    )
    
    
    Net income available to common shares
    
    $
    229,027
    
    
    $
    461,543
    
    
    $
    127,155
    
    
    $
    1,165,279Income per common share:Basic
    
    $
    6.02
    
    
    $
    11.54
    
    
    $
    3.30
    
    
    $
    28.82Diluted
    
    $
    5.72
    
    
    $
    11.14
    
    
    $
    3.12
    
    
    $
    28.26Average common shares outstanding:Basic
    
    
    38,049
    
    
    
    39,999
    
    
    
    38,546
    
    
    
    40,430Diluted
    
    
    40,042
    
    
    
    41,414
    
    
    
    40,737
    
    
    
    41,238
 See accompanying notes.
  4




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Primus Guaranty, Ltd.
 
 Condensed Consolidated Statements of Cash Flows

(Unaudited)
 (in thousands)
 Nine Months EndedSeptember 30,2010
    
    
    2009Cash flows from operating activitiesNet income available to common shares
    
    $
    127,155
    
    
    $
    1,165,279Net loss attributable to non-parent interests in CLOs
    
    
    (60,876
    )
    
    
    Distributions on preferred securities of subsidiary
    
    
    2,444
    
    
    
    2,740Net income
    
    
    68,723
    
    
    
    1,168,019Adjustments to reconcile net income to net cash used in
operating activities:Non-cash items included in net income:Net unrealized gains on CLO loans and securities
    
    
    (36,482
    )
    
    
    Net unrealized losses on CLO notes
    
    
    177,700
    
    
    
    Net realized gains by the CLOs
    
    
    (54,067
    )
    
    
    Net unrealized gains on credit swaps
    
    
    (163,364
    )
    
    
    (1,146,965
    )Gain on retirement of long-term debt
    
    
    (8,185
    )
    
    
    (39,591
    )Impairment loss on available-for-sale investments
    
    
    
    
    
    
    761Other
    
    
    3,680
    
    
    
    4,044Increase (decrease) in cash resulting from changes in:CLO cash and cash equivalents
    
    
    (41,832
    )
    
    
    CLO other assets
    
    
    19,547
    
    
    
    CLO other liabilities
    
    
    24,932
    
    
    
    Restricted cash
    
    
    (3,410
    )
    
    
    Accrued interest and premiums
    
    
    (1,018
    )
    
    
    2,322Other assets
    
    
    (1,505
    )
    
    
    601Trading account assets
    
    
    (54,568
    )
    
    
    3,715Accounts payable and accrued expenses
    
    
    (2,732
    )
    
    
    2,034Payable for credit events
    
    
    (24,558
    )
    
    
    (2,346
    )Other liabilities
    
    
    28,481
    
    
    
    322Net cash used in operating activities
    
    
    (68,658
    )
    
    
    (7,084
    )Cash flows from investing activitiesProceeds from sale of CLO loans and securities
    
    
    728,428
    
    
    
    Purchases of CLO loans and securities
    
    
    (720,141
    )
    
    
    Business acquisition
    
    
    (3,427
    )
    
    
    (3,208
    )Fixed asset purchases
    
    
    (23
    )
    
    
    (97
    )Payments received from CLO investments
    
    
    552
    
    
    
    94Purchases of available-for-sale investments
    
    
    (179,645
    )
    
    
    (154,559
    )Maturities and sales of available-for-sale investments
    
    
    138,191
    
    
    
    479,627Net cash provided by (used in) investing activities
    
    
    (36,065
    )
    
    
    321,857Cash flows from financing activitiesRepayment of CLO notes by the CLOs
    
    
    (37,209
    )
    
    
    Retirement of long-term debt
    
    
    (14,233
    )
    
    
    (19,052
    )Purchase, retirement and issuance of common shares
    
    
    (8,190
    )
    
    
    (5,463
    )Purchase of preferred securities from subsidiary
    
    
    
    
    
    
    (908
    )Net preferred distributions of subsidiary
    
    
    (2,444
    )
    
    
    (2,740
    )Net cash used in financing activities
    
    
    (62,076
    )
    
    
    (28,163
    )Net effect of exchange rate changes on cash
    
    
    (41
    )
    
    
    168Net increase (decrease) in cash
    
    
    (166,840
    )
    
    
    286,778Cash and cash equivalents at beginning of period
    
    
    299,514
    
    
    
    280,912Cash and cash equivalents at end of period
    
    $
    132,674
    
    
    $
    567,690Supplemental disclosuresCash paid for interest
    
    $
    4,197
    
    
    $
    8,292Cash paid for taxes
    
    $
    67
    
    
    $
    128
 See accompanying notes.
  5




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Primus Guaranty, Ltd.
 
 Condensed Consolidated Statements of Equity (Deficit)

(Unaudited)
 (in thousands)
 Nine Months Ended
    
    
    Year EndedSeptember 30, 2010
    
    
    December 31, 2009Common sharesBalance at beginning of period
    
    $
    3,061
    
    
    $
    3,263Common shares purchased and retired
    
    
    (138
    )
    
    
    (275
    )Shares issued under employee compensation plans
    
    
    82
    
    
    
    73Balance at end of period
    
    
    3,005
    
    
    
    3,061Additional paid-in capitalBalance at beginning of period
    
    
    280,685
    
    
    
    281,596Common shares purchased and retired
    
    
    (8,134
    )
    
    
    (10,150
    )Shares vested under employee compensation plans
    
    
    4,872
    
    
    
    4,728Preferred shares purchased by subsidiary
    
    
    
    
    
    
    4,511Balance at end of period
    
    
    277,423
    
    
    
    280,685Accumulated other comprehensive income (loss)Balance at beginning of period
    
    
    2,148
    
    
    
    908Adoption of ASC Topic 810, Consolidation
    
    
    (1,061
    )
    
    
    Foreign currency translation adjustments
    
    
    (41
    )
    
    
    232Change in unrealized holding gains on
available-for-sale securities
    
    
    5,638
    
    
    
    1,008Balance at end of period
    
    
    6,684
    
    
    
    2,148Retained earnings (deficit)Balance at beginning of period
    
    
    (628,443
    )
    
    
    (2,088,723
    )Adoption of ASC Topic 810, Consolidation
    
    
    887
    
    
    
    Net income
    
    
    68,723
    
    
    
    1,463,697Net loss attributable to non-parent interests in CLOs
    
    
    60,876
    
    
    
    Distributions on preferred securities of subsidiary
    
    
    (2,444
    )
    
    
    (3,417
    )Balance at end of period
    
    
    (500,401
    )
    
    
    (628,443
    )Appropriated retained earnings from CLO consolidationAdoption of ASC Topic 810, Consolidation
    
    
    265,639
    
    
    
    Net loss attributable to non-parent interests in CLOs
    
    
    (60,876
    )
    
    
    Balance at end of period
    
    
    204,763
    
    
    
    Total shareholders equity (deficit) of Primus
Guaranty, Ltd.
    
    
    (8,526
    )
    
    
    (342,549
    )Preferred securities of subsidiaryBalance at beginning of period
    
    
    93,102
    
    
    
    98,521Net purchase of preferred shares
    
    
    
    
    
    
    (5,419
    )Balance at end of period
    
    
    93,102
    
    
    
    93,102Total equity (deficit) at end of period
    
    $
    84,576
    
    
    $
    (249,447
    )
 See accompanying notes.
  6




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
  Appropriated Retained Earnings from CLO Consolidations
 Consolidation
 Principles of Consolidation
  Other Recent Accounting Pronouncements
 Fair Value Measurements and Disclosures
(Topic 820)  Improving Disclosures about Fair Value Measurements
 Receivables (Topic 310), Disclosures about the
Credit Quality of Financing Receivables and the Allowance for Credit Losses
  9




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 3. Investments
  September 30, 2010Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAvailable-for-sale:Corporate debt
securities
    
    $
    303,131
    
    
    $
    6,548
    
    
    $
    (41
    )
    
    $
    309,638ABS bonds
    
    
    1,308
    
    
    
    255
    
    
    
    
    
    
    
    1,563Total
available-for-sale
    
    
    304,439
    
    
    
    6,803
    
    
    
    (41
    )
    
    
    311,201Trading:Corporate loans and debt
securities
    
    
    55,017
    
    
    
    341
    
    
    
    (789
    )
    
    
    54,569Total trading
    
    
    55,017
    
    
    
    341
    
    
    
    (789
    )
    
    
    54,569Held-to-maturity:Certificate of deposit
    
    
    170
    
    
    
    
    
    
    
    
    
    
    
    170Total held-to-maturity
    
    
    170
    
    
    
    
    
    
    
    
    
    
    
    170Total investments
    
    $
    359,626
    
    
    $
    7,144
    
    
    $
    (830
    )
    
    $
    365,940
 December 31, 2009Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAvailable-for-sale:Corporate debt securities
    
    $
    271,809
    
    
    $
    1,784
    
    
    $
    (662
    )
    
    $
    272,931Investments in CLOs under management
    
    
    203
    
    
    
    1,062
    
    
    
    
    
    
    
    1,265ABS bonds
    
    
    84
    
    
    
    
    
    
    
    (5
    )
    
    
    79Total available-for-sale
    
    
    272,096
    
    
    
    2,846
    
    
    
    (667
    )
    
    
    274,275Held-to-maturity:Certificate of deposit
    
    
    169
    
    
    
    
    
    
    
    
    
    
    
    169Total held-to-maturity
    
    
    169
    
    
    
    
    
    
    
    
    
    
    
    169Total investments
    
    $
    272,265
    
    
    $
    2,846
    
    
    $
    (667
    )
    
    $
    274,444
    10




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
    September 30, 2010Securities with Unrealized LossesLess than 12 Months
    
    
    12 Months or More
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesCorporate debt securities
    
    $
    25,678
    
    
    $
    (41
    )
    
    $
    
    
    
    $
    
    
    
    $
    25,678
    
    
    $
    (41
    )Total
    
    $
    25,678
    
    
    $
    (41
    )
    
    $
    
    
    
    $
    
    
    
    $
    25,678
    
    
    $
    (41
    )
 December 31, 2009Securities with Unrealized LossesLess than 12 Months
    
    
    12 Months or More
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesCorporate debt securities
    
    $
    121,983
    
    
    $
    (405
    )
    
    $
    2,248
    
    
    $
    (257
    )
    
    $
    124,231
    
    
    $
    (662
    )ABS bonds
    
    
    79
    
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    79
    
    
    
    (5
    )Total
    
    $
    122,062
    
    
    $
    (410
    )
    
    $
    2,248
    
    
    $
    (257
    )
    
    $
    124,310
    
    
    $
    (667
    )
    11




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 4. Credit Swaps
 Net Credit Swap Revenue
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net premiums earned
    
    $
    14,014
    
    
    $
    21,885
    
    
    $
    45,684
    
    
    $
    66,588Net realized losses on credit swaps
    
    
    (17,543
    )
    
    
    (21,500
    )
    
    
    (83,679
    )
    
    
    (58,953
    )Net unrealized gains on credit swaps
    
    
    231,076
    
    
    
    471,450
    
    
    
    163,364
    
    
    
    1,146,964Total net credit swap revenue
    
    $
    227,547
    
    
    $
    471,835
    
    
    $
    125,369
    
    
    $
    1,154,599
 Credit Events and Terminations of Credit Swaps
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Realized losses on single name credit swaps
    
    $
    (14,797
    )
    
    $
    (21,500
    )
    
    $
    (44,031
    )
    
    $
    (31,350
    )Realized losses on tranches
    
    
    (267
    )
    
    
    
    
    
    
    (35,350
    )
    
    
    Realized losses on CDS on ABS
    
    
    (2,778
    )
    
    
    
    
    
    
    (4,597
    )
    
    
    (27,628
    )Total realized losses
    
    $
    (17,842
    )
    
    $
    (21,500
    )
    
    $
    (83,978
    )
    
    $
    (58,978
    )
  12




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
   Lehman Brothers Special Financing Inc.
    13




---



##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 Credit Swap Portfolio Information
  September 30, 2010
    
    
    December 31, 2009Notional
    
    
    Fair
    
    
    Notional
    
    
    FairRating Category
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueBy Single Name Reference
Entity/TrancheCredit Swaps Sold-Single Name:AAA
    
    $
    95,899
    
    
    $
    (1,975
    )
    
    $
    347,963
    
    
    $
    (5,765
    )AA
    
    
    1,179,834
    
    
    
    (9,953
    )
    
    
    1,449,137
    
    
    
    (7,442
    )A
    
    
    3,395,353
    
    
    
    (15,919
    )
    
    
    5,656,180
    
    
    
    (11,217
    )BBB
    
    
    2,698,438
    
    
    
    (11,939
    )
    
    
    4,730,878
    
    
    
    (8,438
    )BB
    
    
    278,384
    
    
    
    (3,558
    )
    
    
    598,908
    
    
    
    (16,584
    )B
    
    
    48,633
    
    
    
    (1,325
    )
    
    
    189,284
    
    
    
    (2,726
    )CCC
    
    
    40,000
    
    
    
    (1,370
    )
    
    
    85,000
    
    
    
    (8,864
    )CC
    
    
    
    
    
    
    
    
    
    
    213,087
    
    
    
    (106,143
    )D
    
    
    
    
    
    
    
    
    
    
    41,000
    
    
    
    (21,868
    )Non rated
    
    
    278,772
    
    
    
    (59,624
    )
    
    
    56,482
    
    
    
    (628
    )Total
    
    $
    8,015,313
    
    
    $
    (105,663
    )
    
    $
    13,367,919
    
    
    $
    (189,675
    )Credit Swaps Sold-Tranche:AAA
    
    $
    2,650,000
    
    
    $
    (232,642
    )
    
    $
    1,575,000
    
    
    $
    (120,112
    )AA
    
    
    200,000
    
    
    
    (18,380
    )
    
    
    1,275,000
    
    
    
    (122,406
    )A
    
    
    300,000
    
    
    
    (40,895
    )
    
    
    
    
    
    
    BBB
    
    
    450,000
    
    
    
    (64,879
    )
    
    
    750,000
    
    
    
    (103,601
    )BB
    
    
    150,000
    
    
    
    (20,156
    )
    
    
    100,000
    
    
    
    (12,997
    )B
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    (17,373
    )CCC
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    (45,393
    )C
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    (53,802
    )Non rated
    
    
    50,000
    
    
    
    (26,382
    )
    
    
    
    
    
    
    Total
    
    $
    3,800,000
    
    
    $
    (403,334
    )
    
    $
    4,100,000
    
    
    $
    (475,684
    )CDS on ABS:BBB
    
    $
    736
    
    
    $
    (361
    )
    
    $
    3,682
    
    
    $
    (2,880
    )B
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    (4,357
    )CCC
    
    
    18,000
    
    
    
    (15,206
    )
    
    
    13,000
    
    
    
    (10,534
    )CC
    
    
    5,000
    
    
    
    (4,648
    )
    
    
    10,000
    
    
    
    (8,989
    )Total
    
    $
    23,736
    
    
    $
    (20,215
    )
    
    $
    31,682
    
    
    $
    (26,760
    )
  14




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 September 30, 2010
    
    
    December 31, 2009Notional
    
    
    Fair
    
    
    Notional
    
    
    FairRating Category
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueBy Single Name Reference
Entity/TrancheCredit Swaps Purchased-Single Name:A
    
    $
    (4,120
    )
    
    $
    81
    
    
    $
    (4,120
    )
    
    $
    25CC
    
    
    (4,040
    )
    
    
    2,779
    
    
    
    (4,040
    )
    
    
    2,396Total
    
    $
    (8,160
    )
    
    $
    2,860
    
    
    $
    (8,160
    )
    
    $
    2,421By Counterparty Buyer / (Seller)Credit Swaps Sold-Single Name:AA
    
    $
    1,512,054
    
    
    $
    (9,586
    )
    
    $
    3,263,322
    
    
    $
    (25,340
    )A
    
    
    6,498,259
    
    
    
    (96,081
    )
    
    
    8,888,189
    
    
    
    (136,293
    )BBB
    
    
    5,000
    
    
    
    4
    
    
    
    
    
    
    
    B
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non rated
    
    
    
    
    
    
    
    
    
    
    1,216,408
    
    
    
    (28,042
    )Total
    
    $
    8,015,313
    
    
    $
    (105,663
    )
    
    $
    13,367,919
    
    
    $
    (189,675
    )Credit Swaps Sold-Tranche:AA
    
    $
    1,850,000
    
    
    $
    (202,988
    )
    
    $
    1,850,000
    
    
    $
    (199,745
    )A
    
    
    1,500,000
    
    
    
    (135,467
    )
    
    
    1,800,000
    
    
    
    (210,057
    )BBB
    
    
    450,000
    
    
    
    (64,879
    )
    
    
    450,000
    
    
    
    (65,882
    )Total
    
    $
    3,800,000
    
    
    $
    (403,334
    )
    
    $
    4,100,000
    
    
    $
    (475,684
    )CDS on ABS:A
    
    $
    23,736
    
    
    $
    (20,215
    )
    
    $
    26,682
    
    
    $
    (22,380
    )B
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non rated
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    (4,380
    )Total
    
    $
    23,736
    
    
    $
    (20,215
    )
    
    $
    31,682
    
    
    $
    (26,760
    )Credit Swaps Purchased-Single Name:A
    
    $
    (8,160
    )
    
    $
    2,860
    
    
    $
    (8,160
    )
    
    $
    2,421Total
    
    $
    (8,160
    )
    
    $
    2,860
    
    
    $
    (8,160
    )
    
    $
    2,421
  15




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
  September 30, 2010
    
    
    December 31, 2009Notional
    
    
    Fair
    
    
    Notional
    
    
    FairCountry of Domicile
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueCredit Swaps Sold-Single NameBy Reference Entity:North America
    
    $
    3,301,615
    
    
    $
    (70,186
    )
    
    $
    6,836,087
    
    
    $
    (161,513
    )Europe
    
    
    4,311,698
    
    
    
    (32,470
    )
    
    
    5,869,832
    
    
    
    (24,249
    )Asia-Pacific
    
    
    352,000
    
    
    
    (2,815
    )
    
    
    522,000
    
    
    
    (3,714
    )Others
    
    
    50,000
    
    
    
    (192
    )
    
    
    140,000
    
    
    
    (199
    )Total
    
    $
    8,015,313
    
    
    $
    (105,663
    )
    
    $
    13,367,919
    
    
    $
    (189,675
    )By Counterparty:North America
    
    $
    3,248,847
    
    
    $
    (23,491
    )
    
    $
    6,359,144
    
    
    $
    (76,784
    )Europe
    
    
    4,704,466
    
    
    
    (81,873
    )
    
    
    6,891,775
    
    
    
    (111,894
    )Asia-Pacific
    
    
    62,000
    
    
    
    (299
    )
    
    
    117,000
    
    
    
    (997
    )Total
    
    $
    8,015,313
    
    
    $
    (105,663
    )
    
    $
    13,367,919
    
    
    $
    (189,675
    )Credit Swaps Sold -TrancheBy Counterparty:North America
    
    $
    600,000
    
    
    $
    (44,416
    )
    
    $
    600,000
    
    
    $
    (47,099
    )Europe
    
    
    3,200,000
    
    
    
    (358,917
    )
    
    
    3,500,000
    
    
    
    (428,585
    )Total
    
    $
    3,800,000
    
    
    $
    (403,333
    )
    
    $
    4,100,000
    
    
    $
    (475,684
    )CDS on ABSBy Reference Entity:North America
    
    $
    23,736
    
    
    $
    (20,215
    )
    
    $
    31,682
    
    
    $
    (26,760
    )Total
    
    $
    23,736
    
    
    $
    (20,215
    )
    
    $
    31,682
    
    
    $
    (26,760
    )By Counterparty:North America
    
    $
    13,736
    
    
    $
    (11,843
    )
    
    $
    21,682
    
    
    $
    (18,830
    )Europe
    
    
    10,000
    
    
    
    (8,372
    )
    
    
    10,000
    
    
    
    (7,930
    )Total
    
    $
    23,736
    
    
    $
    (20,215
    )
    
    $
    31,682
    
    
    $
    (26,760
    )Credit Swaps Purchased-Single NameBy Reference Entity:North America
    
    $
    (8,160
    )
    
    $
    2,860
    
    
    $
    (8,160
    )
    
    $
    2,421Total
    
    $
    (8,160
    )
    
    $
    2,860
    
    
    $
    (8,160
    )
    
    $
    2,421By Counterparty:Europe
    
    $
    (8,160
    )
    
    $
    2,860
    
    
    $
    (8,160
    )
    
    $
    2,421Total
    
    $
    (8,160
    )
    
    $
    2,860
    
    
    $
    (8,160
    )
    
    $
    2,421
  16




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
  September 30, 2010
    
    
    December 31, 2009Notional
    
    
    Fair
    
    
    Notional
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueCredit Swaps Sold-Single NameYear of Maturity2010
    
    $
    1,333,127
    
    
    $
    (743
    )
    
    $
    5,435,860
    
    
    $
    (24,057
    )2011
    
    
    2,278,810
    
    
    
    (64,094
    )
    
    
    2,510,612
    
    
    
    (101,066
    )2012
    
    
    3,700,359
    
    
    
    (39,740
    )
    
    
    4,394,718
    
    
    
    (69,285
    )2013
    
    
    703,017
    
    
    
    (1,086
    )
    
    
    1,026,729
    
    
    
    4,733Total
    
    $
    8,015,313
    
    
    $
    (105,663
    )
    
    $
    13,367,919
    
    
    $
    (189,675
    )Credit Swaps Sold-TrancheYear of Maturity2012
    
    $
    375,000
    
    
    $
    (11,594
    )
    
    $
    375,000
    
    
    $
    (13,350
    )2013
    
    
    100,000
    
    
    
    (33,790
    )
    
    
    200,000
    
    
    
    (71,175
    )2014
    
    
    3,325,000
    
    
    
    (357,950
    )
    
    
    3,525,000
    
    
    
    (391,159
    )Total
    
    $
    3,800,000
    
    
    $
    (403,334
    )
    
    $
    4,100,000
    
    
    $
    (475,684
    )CDS on ABSEstimated Year of Maturity2010
    
    $
    
    
    
    $
    
    
    
    $
    10,000
    
    
    $
    (8,989
    )2011
    
    
    18,000
    
    
    
    (16,125
    )
    
    
    16,682
    
    
    
    (14,199
    )2012
    
    
    5,000
    
    
    
    (3,729
    )
    
    
    5,000
    
    
    
    (3,572
    )2020
    
    
    736
    
    
    
    (361
    )
    
    
    
    
    
    
    Total
    
    $
    23,736
    
    
    $
    (20,215
    )
    
    $
    31,682
    
    
    $
    (26,760
    )Credit Swaps
Purchased-Single NameYear of Maturity2014
    
    $
    (8,160
    )
    
    $
    2,860
    
    
    $
    (8,160
    )
    
    $
    2,421Total
    
    $
    (8,160
    )
    
    $
    2,860
    
    
    $
    (8,160
    )
    
    $
    2,421
  17




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 5. Variable Interest Entities and CLOs
   CLOs
     18




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
   Consolidation
  Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2010
    
    
    September 30, 2010Net CLO lossNet realized gains on CLO loans and securities
    
    $
    12,109
    
    
    $
    60,805Net unrealized gains on CLO loans and securities
    
    
    42,847
    
    
    
    36,481Net realized losses on CLO notes
    
    
    (622
    )
    
    
    (6,737
    )Net unrealized losses on CLO notes
    
    
    (83,099
    )
    
    
    (168,051
    )Other income (loss)
    
    
    (1,235
    )
    
    
    253Total net CLO loss
    
    $
    (30,000
    )
    
    $
    (77,249
    )
  19




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 6. Financial Instruments and Fair Value Disclosures
    
    
    Level 1  Valuations based on unadjusted quoted prices in active markets for identical
assets or liabilities.
  
    
    Level 2  Valuations based on quoted prices in markets that are not considered to be
active; or valuations for which all significant inputs are observable or can be
corroborated by observable market data, either directly or indirectly.
  
    
    Level 3  Valuations in which a significant input or inputs are unobservable and that
are supported by little or no market activity.
   20




---



##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 Fair Value of CLO Assets and Liabilities
    Valuation Techniques
  Valuation Techniques  CLO loans and securities
  Valuation Techniques  CLO notes
 Financial Instruments
  21




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 Nonperformance Risk Adjustment  Credit Swap Portfolio
 Fair Value Measurements and Disclosures,
  September 30,
    
    
    December 31,2010
    
    
    2009Unrealized loss on credit swaps, at fair
value, without nonperformance risk
adjustments
    
    $
    639,248
    
    
    $
    906,382Nonperformance risk adjustments
    
    
    (112,681
    )
    
    
    (214,477
    )Unrealized loss on credit swaps, at fair
value, after nonperformance risk
adjustments
    
    $
    526,567
    
    
    $
    691,905
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net credit swap revenue
without nonperformance risk
adjustments
    
    $
    329,442
    
    
    $
    683,868
    
    
    $
    227,165
    
    
    $
    2,124,460Nonperformance risk adjustments
    
    
    (101,895
    )
    
    
    (212,033
    )
    
    
    (101,796
    )
    
    
    (969,861
    )Net credit swap revenue after
nonperformance risk
adjustments
    
    $
    227,547
    
    
    $
    471,835
    
    
    $
    125,369
    
    
    $
    1,154,599
  22




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 Fair Value Hierarchy Tables
  Quoted Pricesin
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significant
    
    
    Assets /for
    
    
    Observable
    
    
    Unobservable
    
    
    LiabilitiesIdentical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    at Fair(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    ValueAssetsCash and cash equivalents
    
    $
    132,674
    
    
    $
    
    
    
    $
    
    
    
    $
    132,674Investments
    
    
    
    
    
    
    364,207
    
    
    
    1,563
    
    
    
    365,770CLO cash and cash equivalents
    
    
    133,970
    
    
    
    
    
    
    
    
    
    
    
    133,970CLO loans and securities
    
    
    
    
    
    
    2,479,970
    
    
    
    
    
    
    
    2,479,970Unrealized gain on credit swaps
    
    
    
    
    
    
    
    
    
    
    233
    
    
    
    233Other assets
    
    
    
    
    
    
    4,008
    
    
    
    
    
    
    
    4,008Total Assets
    
    $
    266,644
    
    
    $
    2,848,185
    
    
    $
    1,796
    
    
    $
    3,116,625LiabilitiesUnrealized loss on credit swaps
    
    $
    
    
    
    $
    
    
    
    $
    526,567
    
    
    $
    526,567Other liabilities
    
    
    
    
    
    
    
    
    
    
    8,062
    
    
    
    8,062CLO notes
    
    
    
    
    
    
    
    
    
    
    2,348,223
    
    
    
    2,348,223Total Liabilities
    
    $
    
    
    
    $
    
    
    
    $
    2,882,852
    
    
    $
    2,882,852
  Quoted Pricesin
    
    
    Significant
    
    
    
    
    
    
    TotalActive Markets
    
    
    Other
    
    
    Significant
    
    
    Assets /for
    
    
    Observable
    
    
    Unobservable
    
    
    LiabilitiesIdentical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    at Fair(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    ValueAssetsCash and cash equivalents
    
    $
    299,514
    
    
    $
    
    
    
    $
    
    
    
    $
    299,514Investments
    
    
    
    
    
    
    272,931
    
    
    
    1,344
    
    
    
    274,275Unrealized gain on credit swaps
    
    
    
    
    
    
    
    
    
    
    2,207
    
    
    
    2,207Other assets
    
    
    
    
    
    
    1,837
    
    
    
    
    
    
    
    1,837Total Assets
    
    $
    299,514
    
    
    $
    274,768
    
    
    $
    3,551
    
    
    $
    577,833LiabilitiesUnrealized loss on credit swaps
    
    $
    
    
    
    $
    
    
    
    $
    691,905
    
    
    $
    691,905Other liabilities
    
    
    
    
    
    
    
    
    
    
    5,470
    
    
    
    5,470Total Liabilities
    
    $
    
    
    
    $
    
    
    
    $
    697,375
    
    
    $
    697,375
  23




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 Level 3 Assets and Liabilities Reconciliation Tables
  Three Months Ended
    
    
    Three Months EndedSeptember 30, 2010
    
    
    September 30, 2009Unrealized
    
    
    
    
    
    
    UnrealizedGain on
    
    
    
    
    
    
    Gain onCredit Swaps
    
    
    Investments
    
    
    Credit Swaps
    
    
    InvestmentsBalance, beginning of period
    
    $
    126
    
    
    $
    1,197
    
    
    $
    
    
    
    $
    263Realized gains
    
    
    145
    
    
    
    
    
    
    
    
    
    
    
    262Unrealized gains (losses)
    
    
    (38
    )
    
    
    366
    
    
    
    670
    
    
    
    50Purchases, sales, issuances
and settlements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (146
    )Balance, end of period
    
    $
    233
    
    
    $
    1,563
    
    
    $
    670
    
    
    $
    429
  Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2010
    
    
    September 30, 2009Unrealized
    
    
    
    
    
    
    UnrealizedGain on
    
    
    
    
    
    
    Gain onCredit Swaps
    
    
    Investments
    
    
    Credit Swaps
    
    
    InvestmentsBalance, beginning of period
    
    $
    2,207
    
    
    $
    1,344
    
    
    $
    
    
    
    $
    4,737Realized gains (losses)
    
    
    228
    
    
    
    
    
    
    
    
    
    
    
    (1,832
    )Unrealized gains (losses)
    
    
    (2,202
    )
    
    
    357
    
    
    
    670
    
    
    
    138Purchases, sales, issuances and settlements
    
    
    
    
    
    
    (138
    )
    
    
    
    
    
    
    (6,278
    )Balance, end of period
    
    $
    233
    
    
    $
    1,563
    
    
    $
    670
    
    
    $
    429
   24




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
  Three Months Ended
    
    
    Three Months EndedSeptember 30, 2010
    
    
    September 30, 2009UnrealizedOther
    
    
    Loss on Credit
    
    
    Unrealized Loss onCLO Notes
    
    
    Liabilities
    
    
    Swaps
    
    
    Credit SwapsBalance, beginning of period
    
    $
    (2,266,583
    )
    
    $
    (9,117
    )
    
    $
    (757,537
    )
    
    $
    (1,497,947
    )Realized gains (losses)
    
    
    (622
    )
    
    
    
    
    
    
    17,398
    
    
    
    21,500Unrealized gains (losses)
    
    
    (83,099
    )
    
    
    1,055
    
    
    
    213,572
    
    
    
    449,281Purchases, sales, issuances
and settlements
    
    
    2,081
    
    
    
    
    
    
    
    
    
    
    
    Balance, end of period
    
    $
    (2,348,223
    )
    
    $
    (8,062
    )
    
    $
    (526,567
    )
    
    $
    (1,027,166
    )
  Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2010
    
    
    September 30, 2009UnrealizedOther
    
    
    Loss on Credit
    
    
    Unrealized Loss onCLO Notes
    
    
    Liabilities
    
    
    Swaps
    
    
    Credit SwapsBalance, beginning of period
    
    $
    
    
    
    $
    (5,470
    )
    
    $
    (691,905
    )
    
    $
    (2,173,461
    )Adoption of ASC Topic 810,
Consolidation
    
    
    (2,210,642
    )
    
    
    
    
    
    
    
    
    
    
    Realized gains (losses)
    
    
    (6,737
    )
    
    
    
    
    
    
    83,452
    
    
    
    58,953Unrealized gains (losses)
    
    
    (168,051
    )
    
    
    (2,592
    )
    
    
    81,886
    
    
    
    1,087,342Purchases, sales, issuances
and settlements
    
    
    37,207
    
    
    
    
    
    
    
    
    
    
    
    Balance, end of period
    
    $
    (2,348,223
    )
    
    $
    (8,062
    )
    
    $
    (526,567
    )
    
    $
    (1,027,166
    )
   25




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 Financial Instruments Not Carried at Fair Value
   Fair Value Option
 Financial Instruments, Financial Instruments, Financial Instruments,
   26




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 7. Primus Absolute Return Credit Fund and Primus Credit Strategies Fund
   8. Earnings per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income available to common shares
    
    $
    229,027
    
    
    $
    461,543
    
    
    $
    127,155
    
    
    $
    1,165,279Weighted-average basic shares
outstanding
    
    
    38,049
    
    
    
    39,999
    
    
    
    38,546
    
    
    
    40,430Effect of dilutive instruments:Restricted share units
    
    
    1,993
    
    
    
    1,415
    
    
    
    2,191
    
    
    
    808Weighted-average diluted shares
    
    
    40,042
    
    
    
    41,414
    
    
    
    40,737
    
    
    
    41,238Basic EPS
    
    $
    6.02
    
    
    $
    11.54
    
    
    $
    3.30
    
    
    $
    28.82Diluted EPS
    
    $
    5.72
    
    
    $
    11.14
    
    
    $
    3.12
    
    
    $
    28.26
   9. Share  Based Compensation
    27




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
   10. Comprehensive Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income
    
    $
    205,404
    
    
    $
    462,269
    
    
    $
    68,723
    
    
    $
    1,168,019Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    33
    
    
    
    51
    
    
    
    (41
    )
    
    
    168Change in net unrealized gains (losses) on
available-for-sale investments
    
    
    2,833
    
    
    
    1,603
    
    
    
    5,638
    
    
    
    196Comprehensive income
    
    
    208,270
    
    
    
    463,923
    
    
    
    74,320
    
    
    
    1,168,383Less: Distributions on preferred securities of
subsidiary
    
    
    732
    
    
    
    726
    
    
    
    2,444
    
    
    
    2,740Less: Net loss attributable to non-parent
interests in CLOs
    
    
    (24,355
    )
    
    
    
    
    
    
    (60,876
    )
    
    
    Comprehensive income available to common shares
    
    $
    231,893
    
    
    $
    463,197
    
    
    $
    132,752
    
    
    $
    1,165,643
 11. Income Taxes
  12. Subsequent Events
   28




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
  13. Segment Reporting
 Consolidation Consolidation
  Three Months Ended September 30, 2010CreditProtection,AssetManagementand
    
    
    CLOs
    
    
    
    
    
    
    ConsolidatedCorporate
    
    
    Standalone
    
    
    Eliminations
    
    
    TotalsRevenues:Net credit swap revenue
    
    $
    227,547
    
    
    $
    
    
    
    $
    
    
    
    $
    227,547Net CLO loss
    
    
    
    
    
    
    (32,042
    )
    
    
    2,042
    
    
    
    (30,000
    )CLO Interest income
    
    
    
    
    
    
    22,859
    
    
    
    
    
    
    
    22,859Asset management and advisory fees
    
    
    3,355
    
    
    
    
    
    
    
    (3,240
    )
    
    
    115Interest income
    
    
    3,864
    
    
    
    
    
    
    
    (189
    )
    
    
    3,675Gain on retirement of long-term debt
    
    
    752
    
    
    
    
    
    
    
    
    
    
    
    752Other income
    
    
    4,495
    
    
    
    
    
    
    
    (2,042
    )
    
    
    2,453Total revenues (losses)
    
    $
    240,013
    
    
    $
    (9,183
    )
    
    $
    (3,429
    )
    
    $
    227,401Expenses:CLO interest expense
    
    $
    
    
    
    $
    10,012
    
    
    $
    (189
    )
    
    $
    9,823CLO expenses
    
    
    
    
    
    
    5,160
    
    
    
    (3,240
    )
    
    
    1,920Compensation and employee benefits
    
    
    5,080
    
    
    
    
    
    
    
    
    
    
    
    5,080Professional and legal fees
    
    
    1,928
    
    
    
    
    
    
    
    
    
    
    
    1,928Interest expense
    
    
    1,760
    
    
    
    
    
    
    
    
    
    
    
    1,760Other expenses
    
    
    1,412
    
    
    
    
    
    
    
    
    
    
    
    1,412Total expenses
    
    $
    10,180
    
    
    $
    15,172
    
    
    $
    (3,429
    )
    
    $
    21,923Income (loss) before provision
for income taxes
    
    $
    229,833
    
    
    $
    (24,355
    )
    
    $
    
    
    
    $
    205,478Provision for income tax
    
    
    74
    
    
    
    
    
    
    
    
    
    
    
    74Net income (loss)
    
    $
    229,759
    
    
    $
    (24,355
    )
    
    $
    
    
    
    $
    205,404Less: Distributions on preferred
securities of subsidiary
    
    
    732
    
    
    
    
    
    
    
    
    
    
    
    732Less: Net loss attributable to
non-parent interests in CLOs
    
    $
    
    
    
    $
    (24,355
    )
    
    $
    
    
    
    $
    (24,355
    )Net income available to common
shares
    
    $
    229,027
    
    
    $
    
    
    
    $
    
    
    
    $
    229,027Segment assets
    
    $
    673,814
    
    
    $
    2,634,227
    
    
    $
    (14,184
    )
    
    $
    3,293,857
  29




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
  Nine Months Ended September 30, 2010CreditProtection,AssetManagementand
    
    
    CLOs
    
    
    
    
    
    
    ConsolidatedCorporate
    
    
    Standalone
    
    
    Eliminations
    
    
    TotalsRevenues:Net credit swap revenue
    
    $
    125,369
    
    
    $
    
    
    
    $
    
    
    
    $
    125,369Net CLO loss
    
    
    
    
    
    
    (86,898
    )
    
    
    9,649
    
    
    
    (77,249
    )CLO Interest income
    
    
    
    
    
    
    65,791
    
    
    
    
    
    
    
    65,791Asset management and advisory fees
    
    
    10,755
    
    
    
    
    
    
    
    (10,086
    )
    
    
    669Interest income
    
    
    10,469
    
    
    
    
    
    
    
    (553
    )
    
    
    9,916Gain on retirement of long-term debt
    
    
    8,185
    
    
    
    
    
    
    
    
    
    
    
    8,185Other income
    
    
    11,948
    
    
    
    
    
    
    
    (9,649
    )
    
    
    2,299Total revenues (losses)
    
    $
    166,726
    
    
    $
    (21,107
    )
    
    $
    (10,639
    )
    
    $
    134,980Expenses:CLO interest expense
    
    $
    
    
    
    $
    24,471
    
    
    $
    (553
    )
    
    $
    23,918CLO expenses
    
    
    
    
    
    
    15,298
    
    
    
    (10,086
    )
    
    
    5,212Compensation and employee benefits
    
    
    16,271
    
    
    
    
    
    
    
    
    
    
    
    16,271Professional and legal fees
    
    
    5,875
    
    
    
    
    
    
    
    
    
    
    
    5,875Interest expense
    
    
    5,366
    
    
    
    
    
    
    
    
    
    
    
    5,366Other expenses
    
    
    9,538
    
    
    
    
    
    
    
    
    
    
    
    9,538Total expenses
    
    $
    37,050
    
    
    $
    39,769
    
    
    $
    (10,639
    )
    
    $
    66,180Income (loss) before provision
for income taxes
    
    $
    129,676
    
    
    $
    (60,876
    )
    
    $
    
    
    
    $
    68,800Provision for income tax
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    77Net income (loss)
    
    $
    129,599
    
    
    $
    (60,876
    )
    
    $
    
    
    
    $
    68,723Less: Distributions on preferred
securities of subsidiary
    
    
    2,444
    
    
    
    
    
    
    
    
    
    
    
    2,444Less: Net loss attributable to
non-parent interests in CLOs
    
    $
    
    
    
    $
    (60,876
    )
    
    $
    
    
    
    $
    (60,876
    )Net income available to common
shares
    
    $
    127,155
    
    
    $
    
    
    
    $
    
    
    
    $
    127,155Segment assets
    
    $
    673,814
    
    
    $
    2,634,227
    
    
    $
    (14,184
    )
    
    $
    3,293,857
  30




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##### Table of Contents



Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following is a discussion and analysis of our financial condition and results of
operations. This discussion should be read in conjunction with the condensed consolidated
financial statements, including the notes thereto, included elsewhere in this Quarterly Report and
our consolidated financial statements and accompanying notes which appear in the Companys 2009
Annual Report on Form 10-K . It contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those discussed below and in
the Companys 2009 Annual Report on Form 10-K , particularly under Item 1A Risk Factors and the
heading Cautionary Note Regarding Forward-Looking Statements. In this discussion, the terms
Primus Guaranty and we, us, our, and similar terms refer to Primus Guaranty, Ltd. and its
wholly owned subsidiaries; the term the Company refers to Primus Guaranty and the CLOs required
to be consolidated as a result of the adoption of ASC Topic 810, Consolidation; and other
capitalized items used but not defined are as defined elsewhere in this Quarterly Report.
 Business
  Consolidation
 Primus Asset Management
   Primus Financial
   31




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##### Table of Contents



Executive Overview and Business Outlook
        32




---



##### Table of Contents



Critical Accounting Policies
  Consolidation,
 Impact of Adoption of ASC Topic 810, Consolidation
 Consolidation
    33




---



##### Table of Contents



Nonperformance Risk Adjustment
 Fair Value Measurements and Disclosures,
 Fair Value Hierarchy  Level 3 Assets and Liabilities
   Lehman Brothers Special Financing Inc.
    34




---



##### Table of Contents



Results of Operations
 Introduction
 Consolidation Consolidation
     Three Months Ended September 30, 2010 Compared With Three Months Ended September 30, 2009
 Overview of Financial Results
    35




---



##### Table of Contents



Net Credit Swap Revenue
   
    
    Net premiums earned;
 
    
    Net realized gains (losses) on credit swaps, which include gain (losses) on terminated
credit swaps sold and losses on credit events during the period; and
 
    
    Net unrealized gains (losses) on credit swaps.
  Three Months EndedSeptember 30,2010
    
    
    2009Net premiums earned
    
    $
    14,014
    
    
    $
    21,885Net realized losses on credit swaps
    
    
    (17,543
    )
    
    
    (21,500
    )Net unrealized gains on credit swaps
    
    
    231,076
    
    
    
    471,450Total net credit swap revenue
    
    $
    227,547
    
    
    $
    471,835
 Net Premiums Earned
   36




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##### Table of Contents



Net Realized Losses on Credit Swaps
   Net Unrealized Gains on Credit Swaps
  Net CLO Loss
  CLO Interest Income
  Asset Management and Advisory Fees
     37




---



##### Table of Contents



Interest Income
   Gain on Retirement of Long-Term Debt
    Other Income
    38




---



##### Table of Contents



Operating Expenses
  Three Months EndedSeptember 30,2010
    
    
    2009CLO expenses
    
    $
    1,920
    
    
    $
    Compensation and employee benefits
    
    
    5,080
    
    
    
    6,418Professional and legal fees
    
    
    1,928
    
    
    
    2,253Other
    
    
    1,412
    
    
    
    2,543Total operating expenses
    
    $
    10,340
    
    
    $
    11,214Number of full-time employees, at end of period
    
    
    45
    
    
    
    45
     CLO Interest Expense
   39




---



##### Table of Contents



Interest Expense and Preferred Distributions
 Interest Expense
     Preferred Distributions
   Provision for Income Taxes
   40




---



##### Table of Contents



Nine Months Ended September 30, 2010 Compared With Nine Months Ended September 30, 2009
 Overview of Financial Results
        41




---



##### Table of Contents



Net Credit Swap Revenue
   
    
    Net premiums earned;
 
    
    Net realized gains (losses) on credit swaps, which include gain (losses) on terminated
credit swaps sold and losses on credit events during the period; and
 
    
    Net unrealized gains (losses) on credit swaps.
  Nine Months EndedSeptember 30,2010
    
    
    2009Net premiums earned
    
    $
    45,684
    
    
    $
    66,588Net realized losses on credit swaps
    
    
    (83,679
    )
    
    
    (58,953
    )Net unrealized gains on credit swaps
    
    
    163,364
    
    
    
    1,146,964Total net credit swap revenue
    
    $
    125,369
    
    
    $
    1,154,599
 Net Premiums Earned
  Net Realized Losses on Credit Swaps
   Net Unrealized Gains on Credit Swaps
   42




---



##### Table of Contents



Net CLO Loss
  CLO Interest Income
  Asset Management and Advisory Fees
    Interest Income
   Gain on Retirement of Long-Term Debt
    43




---



##### Table of Contents



Impairment Loss on Investments
  Other Income
   Operating Expenses
  Nine Months EndedSeptember 30,2010
    
    
    2009CLO expenses
    
    $
    5,212
    
    
    $
    Compensation and employee benefits
    
    
    16,271
    
    
    
    15,699Professional and legal fees
    
    
    5,875
    
    
    
    5,631Other
    
    
    9,538
    
    
    
    6,648Total operating expenses
    
    $
    36,896
    
    
    $
    27,978Number of full-time employees, at end of period
    
    
    45
    
    
    
    45
   44




---



##### Table of Contents



CLO Interest Expense
  Interest Expense and Preferred Distributions
 Interest Expense
      45




---



##### Table of Contents



Preferred Distributions
   Provision for Income Taxes
  Income Taxes
    46




---



##### Table of Contents



Non-GAAP Financial Measures  Economic Results
  Consolidation,
  
    
    Unrealized gains (losses) on credit swaps sold by Primus Financial are excluded from
GAAP net income (loss) available to common shares;
 
    
    Realized gains from early termination of credit swaps sold by Primus Financial are
excluded from GAAP net income (loss) available to common shares;
 
    
    Realized gains from early termination of credit swaps sold by Primus Financial are
amortized over the period that would have been the remaining life of the credit swap, and
that amortization is added to GAAP net income (loss) available to common shares;
 
    
    Provision for CDS on ABS credit events; and
 
    
    Reduction in provision for CDS on ABS credit events upon termination of credit swaps.
   47




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009GAAP net income available to common shares
    
    $
    229,027
    
    
    $
    461,543
    
    
    $
    127,155
    
    
    $
    1,165,279Adjustments:Change in unrealized fair value of credit
swaps sold (gain) loss by Primus
Financial
    
    
    (231,173
    )
    
    
    (471,450
    )
    
    
    (163,346
    )
    
    
    (1,146,964
    )Realized gains from early termination of
credit swaps sold by Primus Financial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of realized gains from the
early termination of credit swap sold by
Primus Financial
    
    
    145
    
    
    
    339
    
    
    
    703
    
    
    
    1,100Provision for CDS on ABS credit events
    
    
    
    
    
    
    
    
    
    
    (2,374
    )
    
    
    (15,242
    )Reduction in provision for CDS on ABS
credit events upon termination of credit
swaps
    
    
    
    
    
    
    
    
    
    
    1,819
    
    
    
    27,628Economic Results
    
    $
    (2,001
    )
    
    $
    (9,568
    )
    
    $
    (36,043
    )
    
    $
    31,801Economic Results earnings (loss) per GAAP
diluted share
    
    $
    (0.05
    )
    
    $
    (0.23
    )
    
    $
    (0.88
    )
    
    $
    0.77Economic Results weighted average common
shares outstanding  GAAP diluted
    
    
    40,042
    
    
    
    41,414
    
    
    
    40,737
    
    
    
    41,238
  Off-Balance Sheet Arrangements
   48




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##### Table of Contents



Contractual Obligations
  Payment due by periodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsProperty leases
    
    $
    8,116
    
    
    $
    1,737
    
    
    $
    2,911
    
    
    $
    2,312
    
    
    $
    1,1567% Senior Notes
    
    
    90,426
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90,426Interest on 7% Senior Notes (a)
    
    
    160,758
    
    
    
    2,030
    
    
    
    11,630
    
    
    
    12,660
    
    
    
    134,438Subordinated deferrable interest
notes
    
    
    129,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    129,000Interest on subordinated
deferrable interest notes (b)
    
    
    64,720
    
    
    
    4,445
    
    
    
    8,902
    
    
    
    8,890
    
    
    
    42,483Total
    
    $
    453,020
    
    
    $
    8,212
    
    
    $
    23,443
    
    
    $
    23,862
    
    
    $
    397,503
 (a)
    
    Net interest payments on the outstanding 7% Senior Notes at September 30, 2010 are adjusted by
the interest rate swap agreement, which converts a portion of the interest payment on the 7% Senior
Notes from a fixed to a floating basis, as previously discussed. Future payments of interest on the
interest rate swap will be determined by future LIBOR rates, to which a predetermined contractual
rate is added. For the purpose of this table, estimated future LIBOR rates were based on the last
rate set during the third quarter of 2010. The counterparty has the right to terminate the interest
rate swap agreement in 2011, and for the purpose of this table, the interest rate swap is assumed
to be terminated at that date.(b)
    
    Future payments for interest on our subordinated deferrable interest notes will be determined
by future LIBOR rates, to which a predetermined contractual spread is added, as previously
discussed. For the purpose of this table, estimated future LIBOR rates were based on the last rate
set during the third quarter of 2010. Property leases:
  CLOs:
   49




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Liquidity and Capital Resources
          50




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##### Table of Contents



Cash Flows
 Cash flows from operating activities 
 Cash flows from investing activities 
 Cash flows from financing activities 
   51




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Cautionary Note Regarding Forward-Looking Statements
  
    
    fluctuations in the economic, credit, interest rate or foreign
currency environment in the United States and abroad;
    
    the level of activity within the national and international credit markets;
    
    the level of activity in the leveraged buyout and private equity markets;
    
    competitive conditions and pricing levels;
    
    change in rating agency requirements or methodology;
    
    counterparty limits and risk;
    
    legislative and regulatory developments, including changes in accounting principles;
    
    technological developments;
    
    changes in tax laws;
    
    changes in international or national political or economic conditions,
including any terrorist attacks;
    
    the effects of implementation of new or revised accounting pronouncements;
    
    successful divestiture of CypressTree and certain other third-party
asset management products; and
    
    uncertainties that have not been identified at this time.
 
  52




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Item 3. Quantitative and Qualitative Disclosures about Market Risk
     53




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Item 4. Controls and Procedures
   
 Part II. Other Information
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
   54




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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Issuer Purchases of Equity Securities
  Total Number of
    
    
    Approximate DollarTotal
    
    
    
    
    
    
    Shares Purchased
    
    
    Value of Shares thatNumber of
    
    
    Average
    
    
    as Part of Publicly
    
    
    May Yet Be PurchasedShares
    
    
    Price Paid
    
    
    Announced Plans
    
    
    under the Plans orPeriod
    
    Purchased
    
    
    per Share
    
    
    or Programs
    
    
    Programs (a)July 1  31
    
    
    450,600
    
    
    $
    4.06
    
    
    
    450,600
    
    
    $
    22,747,256August 1  31
    
    
    400,300
    
    
    $
    4.11
    
    
    
    400,300
    
    
    $
    21,102,023September 1  30
    
    
    277,400
    
    
    $
    4.37
    
    
    
    277,400
    
    
    $
    19,889,785Total
    
    
    1,128,300
    
    
    $
    4.15
    
    
    
    1,128,300
 (a)
    
    On October 8, 2008, our board of directors authorized the implementation of a buyback
program for the purchase of our common shares and/or the 7% Senior Notes in the aggregate up to
$25.0 million. On February 3, 2010, our board of directors authorized an additional expenditure of
up to $15.0 million of available cash for the purchase of our common shares and/or our 7% Senior
Notes. On July 29, 2010, our board of directors authorized an additional expenditure of up to $5.0
million of available cash for the purchase of our common shares and/or our 7% Senior Notes. The
amounts in this column do not reflect the cost of approximately $14.5 million for purchases of our
7% Senior Notes, since inception of our buyback program through the quarter ended September 30,
2010. 
 Item 6. Exhibits
  10.1
    
    
    Primus Guaranty, Ltd. Restricted Share Unit Deferral Plan (As amended and restated
effective as of July 29, 2010)10.2
    
    
    Primus Guaranty, Ltd. Incentive Compensation Plan (including amendments through July 29,
2010)10.3
    
    
    Termination Agreement, dated September 27, 2010, by and among Primus Financial Products, LLC,
Lehman Brothers Special Financing Inc. and Lehman Brothers Holdings Inc.10.4
    
    
    Separation Agreement, dated October 29, 2010, between Thomas W. Jasper and Primus Asset
Management, Inc.12
    
    
    Ratio of Earnings to Combined Fixed Charges and Preferred Share Dividend Requirements31.1
    
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
200231.2
    
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
200232
    
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
 
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SIGNATURES
  PRIMUS GUARANTY, LTD./s/ Richard ClaidenRichard ClaidenChief Executive Officer/s/ Christopher N. GerosaChristopher N. GerosaChief Financial Officer(Duly Authorized Officer and Principal 
Financial Officer)   56




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description10.1
    
    
    Primus Guaranty, Ltd. Restricted Share Unit Deferral Plan (As amended and restated
effective as of July 29, 2010)10.2
    
    
    Primus Guaranty, Ltd. Incentive Compensation Plan (including amendments through July 29,
2010)10.3
    
    
    Termination Agreement, dated September 27, 2010, by and among Primus Financial Products, LLC,
Lehman Brothers Special Financing Inc. and Lehman Brothers Holdings Inc.10.4
    
    
    Separation Agreement, dated October 29, 2010, between Thomas W. Jasper and Primus Asset
Management, Inc.12
    
    
    Ratio of Earnings to Combined Fixed Charges and Preferred Share Dividend Requirements31.1
    
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
200231.2
    
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
200232
    
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
  57