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




---



##### 



Primus Guaranty, Ltd.
 Form 10-Q
  INDEX
 Part I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Statements of Financial Condition as of
September 30, 2008 (Unaudited) and December 31, 2007
    
    
    3Condensed Consolidated Statements of Operations (Unaudited) for the
three and nine months ended September 30, 2008 and 2007
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited) for the
nine months ended September 30, 2008 and 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    30Cautionary Note Regarding Forward-Looking Statements
    
    
    58Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    59Item 4. Controls and Procedures
    
    
    60Part II. Other InformationItem 1. Legal Proceedings
    
    
    60Item 1A. Risk Factors
    
    
    60Item 6. Exhibits
    
    
    61Signatures
    
    
    62Exhibit 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
 (in thousands except share amounts)
 September 30,
    
    
    December 31,2008
    
    
    2007(unaudited)AssetsCash and cash equivalents
    
    $
    298,335
    
    
    $
    242,665Available-for-sale investments
    
    
    615,472
    
    
    
    617,631Accrued interest receivable
    
    
    4,020
    
    
    
    7,684Accrued premiums and receivables on credit and other swaps
    
    
    2,612
    
    
    
    4,187Unrealized gain on credit and other swaps, at fair value
    
    
    16
    
    
    
    606Fixed assets and software costs, net
    
    
    4,739
    
    
    
    5,036Debt issuance costs, net
    
    
    6,731
    
    
    
    6,965Other assets
    
    
    3,224
    
    
    
    3,872Total assets
    
    $
    935,149
    
    
    $
    888,646Liabilities and shareholders equity (deficit)Accounts payable and accrued expenses
    
    $
    1,749
    
    
    $
    2,182Accrued compensation
    
    
    2,929
    
    
    
    5,957Interest payable
    
    
    397
    
    
    
    831Unrealized loss on credit and other swaps, at fair value
    
    
    1,313,815
    
    
    
    544,731Payable for credit events
    
    
    84,491
    
    
    
    Accrued premiums and payables on credit and other swaps
    
    
    
    
    
    
    1,770Long-term debt
    
    
    326,186
    
    
    
    325,904Restructuring liabilities
    
    
    
    
    
    
    1,709Other liabilities
    
    
    466
    
    
    
    503Total liabilities
    
    
    1,730,033
    
    
    
    883,587Preferred securities of subsidiary
    
    
    98,521
    
    
    
    98,521Commitments and contingenciesShareholders equity (deficit)Common shares, $0.08 par value, 62,500,000 shares
authorized, 45,234,113 and 45,035,593 shares issued and
outstanding at September 30, 2008 and December 31, 2007,
respectively
    
    
    3,619
    
    
    
    3,603Additional paid-in capital
    
    
    283,529
    
    
    
    280,224Accumulated other comprehensive loss
    
    
    (10,282
    )
    
    
    (4,712
    )Retained earnings (deficit)
    
    
    (1,170,271
    )
    
    
    (372,577
    )Total shareholders equity (deficit)
    
    
    (893,405
    )
    
    
    (93,462
    )Total liabilities, preferred securities of subsidiary
and shareholders equity (deficit)
    
    $
    935,149
    
    
    $
    888,646
 See accompanying notes.
  3




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Primus Guaranty, Ltd.
 
 Condensed Consolidated Statements of Operations
 (in thousands except per share amounts)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(unaudited)
    
    
    (unaudited)RevenuesNet credit swap loss
    
    $
    (387,683
    )
    
    $
    (120,122
    )
    
    $
    (780,308
    )
    
    $
    (140,994
    )Asset management and advisory fees
    
    
    1,096
    
    
    
    1,097
    
    
    
    3,276
    
    
    
    2,383Interest income
    
    
    6,212
    
    
    
    10,881
    
    
    
    21,725
    
    
    
    31,174Other trading loss
    
    
    
    
    
    
    (3,887
    )
    
    
    
    
    
    
    (1,920
    )Foreign currency revaluation loss
    
    
    (140
    )
    
    
    
    
    
    
    (267
    )
    
    
    (12
    )Total net losses
    
    
    (380,515
    )
    
    
    (112,031
    )
    
    
    (755,574
    )
    
    
    (109,369
    )ExpensesCompensation and employee benefits
    
    
    1,739
    
    
    
    4,890
    
    
    
    13,894
    
    
    
    16,866Professional and legal fees
    
    
    796
    
    
    
    1,355
    
    
    
    3,100
    
    
    
    3,794Depreciation and amortization
    
    
    336
    
    
    
    387
    
    
    
    999
    
    
    
    1,334Technology and data
    
    
    854
    
    
    
    1,286
    
    
    
    2,865
    
    
    
    3,241Interest expense
    
    
    3,974
    
    
    
    5,315
    
    
    
    12,838
    
    
    
    15,036Other
    
    
    596
    
    
    
    1,469
    
    
    
    3,219
    
    
    
    4,414Total expenses
    
    
    8,295
    
    
    
    14,702
    
    
    
    36,915
    
    
    
    44,685Distributions on preferred securities
of subsidiary
    
    
    1,397
    
    
    
    1,702
    
    
    
    5,144
    
    
    
    5,563Loss before provision for income taxes
    
    
    (390,207
    )
    
    
    (128,435
    )
    
    
    (797,633
    )
    
    
    (159,617
    )Provision for income taxes
    
    
    12
    
    
    
    
    
    
    
    61
    
    
    
    52Net loss available to common shares
    
    $
    (390,219
    )
    
    $
    (128,435
    )
    
    $
    (797,694
    )
    
    $
    (159,669
    )Loss per common share:Basic
    
    $
    (8.63
    )
    
    $
    (2.85
    )
    
    $
    (17.65
    )
    
    $
    (3.57
    )Diluted
    
    $
    (8.63
    )
    
    $
    (2.85
    )
    
    $
    (17.65
    )
    
    $
    (3.57
    )Average common shares outstanding:Basic
    
    
    45,230
    
    
    
    45,024
    
    
    
    45,187
    
    
    
    44,734Diluted
    
    
    45,230
    
    
    
    45,024
    
    
    
    45,187
    
    
    
    44,734
 See accompanying notes.
  4




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Primus Guaranty, Ltd.
 
 Condensed Consolidated Statements of Cash Flows
 (in thousands)
 Nine Months EndedSeptember 30,2008
    
    
    2007(unaudited)Cash flows from operating activitiesNet loss
    
    $
    (797,694
    )
    
    $
    (159,669
    )Adjustments to reconcile net loss to net cash provided by operating activities:Non-cash items included in net loss:Depreciation and amortization
    
    
    999
    
    
    
    1,334Share compensation
    
    
    3,522
    
    
    
    2,865Net unrealized losses on credit and other swaps
    
    
    769,675
    
    
    
    190,595Net amortization of premium and discount on securities
    
    
    (1,552
    )
    
    
    (6,710
    )Amortization of debt issuance costs
    
    
    234
    
    
    
    233Distributions on preferred securities of subsidiary
    
    
    5,144
    
    
    
    5,563Increase (decrease) in cash resulting from changes in:Accrued interest receivable
    
    
    3,664
    
    
    
    (2,038
    )Accrued premiums and interest receivable on credit and other swaps
    
    
    1,575
    
    
    
    (75
    )Other assets
    
    
    930
    
    
    
    (781
    )Trading account assets
    
    
    
    
    
    
    (4,021
    )Accounts payable and accrued expenses
    
    
    (434
    )
    
    
    566Accrued compensation
    
    
    (3,028
    )
    
    
    (3,422
    )Trading account liabilities
    
    
    
    
    
    
    8,886Accrued premiums and payables on credit and other swaps
    
    
    (1,770
    )
    
    
    38,013Payable for credit events
    
    
    84,491
    
    
    
    Interest payable
    
    
    (434
    )
    
    
    37Restructuring liabilities
    
    
    (1,709
    )
    
    
    Other liabilities
    
    
    (37
    )
    
    
    (58
    )Net cash provided by operating activities
    
    
    63,576
    
    
    
    71,318Cash flows from investing activitiesFixed asset purchases and capitalized software costs
    
    
    (702
    )
    
    
    (2,143
    )Payments received from CLO investments
    
    
    2,798
    
    
    
    693Purchases of available-for-sale investments
    
    
    (1,424,539
    )
    
    
    (529,957
    )Maturities and sales of available-for-sale investments
    
    
    1,420,051
    
    
    
    519,897Net cash used in investing activities
    
    
    (2,392
    )
    
    
    (11,510
    )Cash flows from financing activitiesRepurchase and retirement of common shares
    
    
    (201
    )
    
    
    (1,149
    )Proceeds from exercise of options
    
    
    
    
    
    
    557Proceeds from exercise of warrants
    
    
    
    
    
    
    7,335Net preferred distributions of subsidiary
    
    
    (5,144
    )
    
    
    (5,563
    )Net cash provided by (used in) financing activities
    
    
    (5,345
    )
    
    
    1,180Net effect of exchange rate changes on cash
    
    
    (169
    )
    
    
    23Net increase in cash
    
    
    55,670
    
    
    
    61,011Cash and cash equivalents at beginning of period
    
    
    242,665
    
    
    
    204,428Cash and cash equivalents at end of period
    
    $
    298,335
    
    
    $
    265,439Supplemental disclosuresCash paid for interest
    
    $
    13,038
    
    
    $
    14,915Cash paid for taxes
    
    $
    38
    
    
    $
    36
 See accompanying notes.
  5




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1. Organization and Basis of Presentation
       6




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




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Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133
and FASB Interpretation No. 45
 3. Available-for-sale Investments
 Accounting for Certain Investments in
Debt and Equity Securities Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial
Assets.
  September 30, 2008Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueU.S. government agency obligations
    
    $
    584,819
    
    
    $
    132
    
    
    $
    (536
    )
    
    $
    584,415Collateralized loan obligations
    
    
    13,210
    
    
    
    
    
    
    
    (7,456
    )
    
    
    5,754Corporate debt securities
    
    
    27,747
    
    
    
    
    
    
    
    (2,444
    )
    
    
    25,303Total
    
    $
    625,776
    
    
    $
    132
    
    
    $
    (10,436
    )
    
    $
    615,472
 December 31, 2007Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueU.S. government agency obligations
    
    $
    607,663
    
    
    $
    480
    
    
    $
    (169
    )
    
    $
    607,974Collateralized loan obligations
    
    
    14,880
    
    
    
    
    
    
    
    (5,223
    )
    
    
    9,657Total
    
    $
    622,543
    
    
    $
    480
    
    
    $
    (5,392
    )
    
    $
    617,631
  8




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September 30, 2008Securities with Unrealized LossesLess than 12 Months
    
    
    12 Months or More
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesU.S. government agency obligations
    
    $
    414,070
    
    
    $
    (536
    )
    
    $
    
    
    
    $
    
    
    
    $
    414,070
    
    
    $
    (536
    )Collateralized loan obligations
    
    
    
    
    
    
    
    
    
    
    5,754
    
    
    
    (7,456
    )
    
    
    5,754
    
    
    
    (7,456
    )Corporate debt securities
    
    
    25,303
    
    
    
    (2,444
    )
    
    
    
    
    
    
    
    
    
    
    25,303
    
    
    
    (2,444
    )Total
    
    $
    439,373
    
    
    $
    (2,980
    )
    
    $
    5,754
    
    
    $
    (7,456
    )
    
    $
    445,127
    
    
    $
    (10,436
    )
 December 31, 2007Securities with Unrealized LossesLess than 12 Months
    
    
    12 Months or More
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesU.S. government
agency obligations
    
    $
    127,139
    
    
    $
    (59
    )
    
    $
    104,600
    
    
    $
    (110
    )
    
    $
    231,739
    
    
    $
    (169
    )Collateralized loan
obligations
    
    
    5,302
    
    
    
    (3,065
    )
    
    
    4,355
    
    
    
    (2,158
    )
    
    
    9,657
    
    
    
    (5,223
    )Total
    
    $
    132,441
    
    
    $
    (3,124
    )
    
    $
    108,955
    
    
    $
    (2,268
    )
    
    $
    241,396
    
    
    $
    (5,392
    )
    9




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##### Table of Contents



4. Net Credit Swap Loss and Portfolio
 Overview
       10




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##### Table of Contents



Primus Financial
     Harrier/PRS Trading Strategies
   11




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##### Table of Contents



Consolidated Net Credit Swap Loss and Credit Swap Portfolio Information
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net premium income
    
    $
    24,378
    
    
    $
    22,382
    
    
    $
    78,928
    
    
    $
    61,168Realized gains
    
    
    2,196
    
    
    
    1,337
    
    
    
    3,229
    
    
    
    3,352Realized losses
    
    
    (86,611
    )
    
    
    (13,663
    )
    
    
    (92,695
    )
    
    
    (16,502
    )Net change in unrealized losses
    
    
    (327,646
    )
    
    
    (130,178
    )
    
    
    (769,770
    )
    
    
    (189,012
    )Net credit swap loss
    
    $
    (387,683
    )
    
    $
    (120,122
    )
    
    $
    (780,308
    )
    
    $
    (140,994
    )
   September 30,
    
    
    December 31,2008
    
    
    2007Gross Notional Amounts:Credit swaps sold-single name
    
    $
    17,799,107
    
    
    $
    18,260,653Credit swaps sold-tranche
    
    
    5,000,000
    
    
    
    4,700,000Credit swaps sold-ABS
    
    
    75,000
    
    
    
    80,000Credit swaps purchased-single name
    
    
    (11,740
    )
    
    
    (25,410
    )Fair value:Asset
    
    
    16
    
    
    
    606Liability
    
    
    1,313,815
    
    
    
    544,731Average fair value:Asset
    
    
    660
    
    
    
    33,217Liability
    
    
    1,084,604
    
    
    
    165,087
   12




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##### Table of Contents



September 30, 2008
    
    
    December 31, 2007Notional
    
    
    Fair
    
    
    Notional
    
    
    FairMoodys Rating Category
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueBy Single Name Reference
Entity/TrancheCredit Swaps Sold-Single Name:Aaa
    
    $
    526,598
    
    
    $
    (18,219
    )
    
    $
    828,504
    
    
    $
    (3,953
    )Aa
    
    
    2,973,120
    
    
    
    (94,386
    )
    
    
    3,832,904
    
    
    
    (91,863
    )A
    
    
    5,942,723
    
    
    
    (114,547
    )
    
    
    6,047,762
    
    
    
    (36,544
    )Baa
    
    
    7,152,257
    
    
    
    (175,127
    )
    
    
    6,882,813
    
    
    
    (22,162
    )Ba
    
    
    733,829
    
    
    
    (25,001
    )
    
    
    570,090
    
    
    
    (17,235
    )B
    
    
    362,982
    
    
    
    (73,245
    )
    
    
    71,080
    
    
    
    (2,390
    )Caa
    
    
    101,598
    
    
    
    (45,036
    )
    
    
    27,500
    
    
    
    (2,791
    )D
    
    
    6,000
    
    
    
    (756
    )
    
    
    
    
    
    
    Total
    
    $
    17,799,107
    
    
    $
    (546,317
    )
    
    $
    18,260,653
    
    
    $
    (176,938
    )Credit Swaps Sold-Tranche:Aaa
    
    $
    3,300,000
    
    
    $
    (335,830
    )
    
    $
    3,450,000
    
    
    $
    (172,175
    )Aa
    
    
    1,050,000
    
    
    
    (180,723
    )
    
    
    950,000
    
    
    
    (94,312
    )A
    
    
    400,000
    
    
    
    (100,935
    )
    
    
    300,000
    
    
    
    (53,569
    )Baa
    
    
    200,000
    
    
    
    (72,483
    )
    
    
    
    
    
    
    Ba
    
    
    50,000
    
    
    
    (25,384
    )
    
    
    
    
    
    
    Total
    
    $
    5,000,000
    
    
    $
    (715,355
    )
    
    $
    4,700,000
    
    
    $
    (320,056
    )Credit Swaps Sold-ABS (1):A
    
    $
    15,000
    
    
    $
    (10,186
    )
    
    $
    25,000
    
    
    $
    (12,821
    )Baa
    
    
    10,000
    
    
    
    (7,630
    )
    
    
    35,000
    
    
    
    (20,470
    )Ba
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    (11,353
    )B
    
    
    10,000
    
    
    
    (7,255
    )
    
    
    5,000
    
    
    
    (4,038
    )Caa
    
    
    40,000
    
    
    
    (31,487
    )
    
    
    
    
    
    
    Total
    
    $
    75,000
    
    
    $
    (56,558
    )
    
    $
    80,000
    
    
    $
    (48,682
    )Credit Swaps Purchased-Single Name:Aa
    
    $
    
    
    
    $
    
    
    
    $
    (8,160
    )
    
    $
    403A
    
    
    (4,120
    )
    
    
    1,087
    
    
    
    (12,380
    )
    
    
    335Baa
    
    
    (7,620
    )
    
    
    3,344
    
    
    
    (4,870
    )
    
    
    813Total
    
    $
    (11,740
    )
    
    $
    4,431
    
    
    $
    (25,410
    )
    
    $
    1,551
 (1) 
    
    See note 6 Credit Events  CDS on ABS of notes to condensed consolidated financial
statements for further discussion.  13




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##### Table of Contents



By Counterparty Buyer / (Seller)Credit Swaps Sold-Single Name:Aaa
    
    $
    1,512,022
    
    
    $
    (41,588
    )
    
    $
    3,625,845
    
    
    $
    (34,091
    )Aa
    
    
    13,110,019
    
    
    
    (415,564
    )
    
    
    12,153,764
    
    
    
    (118,109
    )A
    
    
    1,757,688
    
    
    
    (41,953
    )
    
    
    2,481,044
    
    
    
    (24,738
    )Non rated (2)
    
    
    1,419,378
    
    
    
    (47,212
    )
    
    
    
    
    
    
    Total
    
    $
    17,799,107
    
    
    $
    (546,317
    )
    
    $
    18,260,653
    
    
    $
    (176,938
    )Credit Swaps Sold-Tranche:Aaa
    
    $
    
    
    
    $
    
    
    
    $
    400,000
    
    
    $
    (33,706
    )Aa
    
    
    4,550,000
    
    
    
    (632,449
    )
    
    
    3,850,000
    
    
    
    (246,490
    )A
    
    
    450,000
    
    
    
    (82,906
    )
    
    
    450,000
    
    
    
    (39,860
    )Total
    
    $
    5,000,000
    
    
    $
    (715,355
    )
    
    $
    4,700,000
    
    
    $
    (320,056
    )Credit Swaps Sold-ABS (1):Aaa
    
    $
    
    
    
    $
    
    
    
    $
    15,000
    
    
    $
    (10,241
    )Aa
    
    
    50,000
    
    
    
    (36,345
    )
    
    
    40,000
    
    
    
    (21,969
    )A
    
    
    20,000
    
    
    
    (15,895
    )
    
    
    25,000
    
    
    
    (16,472
    )Non rated (2)
    
    
    5,000
    
    
    
    (4,318
    )
    
    
    
    
    
    
    Total
    
    $
    75,000
    
    
    $
    (56,558
    )
    
    $
    80,000
    
    
    $
    (48,682
    )Credit Swaps Purchased-Single Name:Aaa
    
    $
    
    
    
    $
    
    
    
    $
    (5,000
    )
    
    $
    383Aa
    
    
    (11,740
    )
    
    
    4,431
    
    
    
    (20,410
    )
    
    
    1,168Total
    
    $
    (11,740
    )
    
    $
    4,431
    
    
    $
    (25,410
    )
    
    $
    1,551
 (1) 
    
    See note 6 Credit Events  CDS on ABS of notes to condensed consolidated financial statements
for further discussion.(2) 
    
    See note 6 Credit Events  Counterparty Default  Lehman Brothers Special Financing Inc. for
further discussion.  14




---



##### Table of Contents



September 30, 2008
    
    
    December 31, 2007Notional
    
    
    Fair
    
    
    Notional
    
    
    FairS&P Rating Category
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueBy Single Name Reference
Entity/TrancheCredit Swaps Sold-Single Name:AAA
    
    $
    646,598
    
    
    $
    (35,068
    )
    
    $
    1,071,504
    
    
    $
    (32,181
    )AA
    
    
    2,704,764
    
    
    
    (61,274
    )
    
    
    3,704,784
    
    
    
    (56,437
    )A
    
    
    7,011,278
    
    
    
    (190,743
    )
    
    
    6,550,733
    
    
    
    (42,398
    )BBB
    
    
    6,241,150
    
    
    
    (96,284
    )
    
    
    6,326,638
    
    
    
    (20,200
    )BB
    
    
    826,375
    
    
    
    (90,385
    )
    
    
    478,820
    
    
    
    (14,583
    )B
    
    
    319,121
    
    
    
    (69,007
    )
    
    
    128,174
    
    
    
    (11,139
    )CCC
    
    
    43,821
    
    
    
    (2,800
    )
    
    
    
    
    
    
    D
    
    
    6,000
    
    
    
    (756
    )
    
    
    
    
    
    
    Total
    
    $
    17,799,107
    
    
    $
    (546,317
    )
    
    $
    18,260,653
    
    
    $
    (176,938
    )Credit Swaps Sold-Tranche:AAA
    
    $
    3,700,000
    
    
    $
    (398,033
    )
    
    $
    3,800,000
    
    
    $
    (212,582
    )AA
    
    
    650,000
    
    
    
    (118,521
    )
    
    
    700,000
    
    
    
    (67,998
    )A
    
    
    100,000
    
    
    
    (19,095
    )
    
    
    100,000
    
    
    
    (21,880
    )BBB
    
    
    550,000
    
    
    
    (179,706
    )
    
    
    100,000
    
    
    
    (17,596
    )Total
    
    $
    5,000,000
    
    
    $
    (715,355
    )
    
    $
    4,700,000
    
    
    $
    (320,056
    )Credit Swaps Sold-ABS (1):A
    
    $
    
    
    
    $
    
    
    
    $
    50,000
    
    
    $
    (29,921
    )BBB
    
    
    15,000
    
    
    
    (11,748
    )
    
    
    15,000
    
    
    
    (7,242
    )BB
    
    
    10,000
    
    
    
    (7,255
    )
    
    
    15,000
    
    
    
    (11,519
    )B
    
    
    10,000
    
    
    
    (6,581
    )CCC
    
    
    10,000
    
    
    
    (7,246
    )
    
    
    
    
    
    
    CC
    
    
    30,000
    
    
    
    (23,728
    )
    
    
    
    
    
    
    Total
    
    $
    75,000
    
    
    $
    (56,558
    )
    
    $
    80,000
    
    
    $
    (48,682
    )Credit Swaps Purchased-Single Name:AA
    
    $
    
    
    
    $
    
    
    
    $
    (8,160
    )
    
    $
    403A
    
    
    (11,740
    )
    
    
    4,431
    
    
    
    (12,250
    )
    
    
    765BBB
    
    
    
    
    
    
    
    
    
    
    (5,000
    )
    
    
    383Total
    
    $
    (11,740
    )
    
    $
    4,431
    
    
    $
    (25,410
    )
    
    $
    1,551
 (1) 
    
    See note 6 Credit Events  CDS on ABS of notes to condensed consolidated financial
statements for further discussion.  15




---



##### Table of Contents



By Counterparty Buyer / (Seller)Credit Swaps Sold-Single Name:AAA
    
    $
    
    
    
    $
    
    
    
    $
    5,000
    
    
    $
    3AA
    
    
    13,021,373
    
    
    
    (366,443
    )
    
    
    14,367,841
    
    
    
    (131,277
    )A
    
    
    3,358,356
    
    
    
    (132,662
    )
    
    
    3,887,812
    
    
    
    (45,664
    )Non rated (2)
    
    
    1,419,378
    
    
    
    (47,212
    )
    
    
    
    
    
    
    Total
    
    $
    17,799,107
    
    
    $
    (546,317
    )
    
    $
    18,260,653
    
    
    $
    (176,938
    )Credit Swaps Sold-Tranche:AA
    
    $
    4,550,000
    
    
    $
    (632,449
    )
    
    $
    4,250,000
    
    
    $
    (280,196
    )A
    
    
    450,000
    
    
    
    (82,906
    )
    
    
    450,000
    
    
    
    (39,860
    )Total
    
    $
    5,000,000
    
    
    $
    (715,355
    )
    
    $
    4,700,000
    
    
    $
    (320,056
    )Credit Swaps Sold-ABS (1):AA
    
    $
    50,000
    
    
    $
    (36,345
    )
    
    $
    55,000
    
    
    $
    (32,210
    )A
    
    
    20,000
    
    
    
    (15,895
    )
    
    
    25,000
    
    
    
    (16,472
    )Non rated (2)
    
    
    5,000
    
    
    
    (4,318
    )
    
    
    
    
    
    
    Total
    
    $
    75,000
    
    
    $
    (56,558
    )
    
    $
    80,000
    
    
    $
    (48,682
    )Credit Swaps Purchased-Single Name:AA
    
    $
    (11,740
    )
    
    $
    4,431
    
    
    $
    (25,410
    )
    
    $
    1,551Total
    
    $
    (11,740
    )
    
    $
    4,431
    
    
    $
    (25,410
    )
    
    $
    1,551
 (1) 
    
    See note 6 Credit Events  CDS on ABS of notes to condensed consolidated financial
statements for further discussion.(2) 
    
    See note 6 Credit Events  Counterparty Default  Lehman Brothers Special Financing Inc.
for further discussion.   16




---



##### Table of Contents



September 30, 2008
    
    
    December 31, 2007Notional
    
    
    Fair
    
    
    Notional
    
    
    FairCountry of Domicile
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueCredit Swaps Sold-Single NameBy Reference Entity:North America
    
    $
    9,242,328
    
    
    $
    (394,952
    )
    
    $
    9,531,846
    
    
    $
    (149,169
    )Europe
    
    
    7,670,779
    
    
    
    (127,763
    )
    
    
    7,837,807
    
    
    
    (21,719
    )Asia-Pacific
    
    
    707,000
    
    
    
    (18,921
    )
    
    
    712,000
    
    
    
    (4,791
    )Others
    
    
    179,000
    
    
    
    (4,681
    )
    
    
    179,000
    
    
    
    (1,259
    )Total
    
    $
    17,799,107
    
    
    $
    (546,317
    )
    
    $
    18,260,653
    
    
    $
    (176,938
    )By Counterparty:North America
    
    $
    9,024,776
    
    
    $
    (277,577
    )
    
    $
    9,431,827
    
    
    $
    (100,747
    )Europe
    
    
    8,632,331
    
    
    
    (266,736
    )
    
    
    8,686,826
    
    
    
    (75,709
    )Asia-Pacific
    
    
    132,000
    
    
    
    (2,020
    )
    
    
    132,000
    
    
    
    (534
    )Others
    
    
    10,000
    
    
    
    16
    
    
    
    10,000
    
    
    
    52Total
    
    $
    17,799,107
    
    
    $
    (546,317
    )
    
    $
    18,260,653
    
    
    $
    (176,938
    )Credit Swaps Sold -TrancheBy Counterparty:North America
    
    $
    600,000
    
    
    $
    (66,181
    )
    
    $
    
    
    
    $
    Europe
    
    
    4,400,000
    
    
    
    (649,174
    )
    
    
    4,700,000
    
    
    
    (320,056
    )Total
    
    $
    5,000,000
    
    
    $
    (715,355
    )
    
    $
    4,700,000
    
    
    $
    (320,056
    )Credit Swaps Sold-ABS(1)By Reference Entity:North America
    
    $
    75,000
    
    
    $
    (56,558
    )
    
    $
    80,000
    
    
    $
    (48,682
    )Total
    
    $
    75,000
    
    
    $
    (56,558
    )
    
    $
    80,000
    
    
    $
    (48,682
    )By Counterparty:North America
    
    $
    45,000
    
    
    $
    (33,398
    )
    
    $
    45,000
    
    
    $
    (24,418
    )Europe
    
    
    30,000
    
    
    
    (23,160
    )
    
    
    35,000
    
    
    
    (24,264
    )Total
    
    $
    75,000
    
    
    $
    (56,558
    )
    
    $
    80,000
    
    
    $
    (48,682
    )Credit Swaps
Purchased-Single NameBy Reference Entity:North America
    
    $
    (11,740
    )
    
    $
    4,431
    
    
    $
    (25,410
    )
    
    $
    1,551Total
    
    $
    (11,740
    )
    
    $
    4,431
    
    
    $
    (25,410
    )
    
    $
    1,551By Counterparty:Europe
    
    $
    (11,740
    )
    
    $
    4,431
    
    
    $
    (25,410
    )
    
    $
    1,551Total
    
    $
    (11,740
    )
    
    $
    4,431
    
    
    $
    (25,410
    )
    
    $
    1,551
 (1) 
    
    See note 6 Credit Events  CDS on ABS of notes to condensed consolidated
financial statements for further discussion.  17




---



##### Table of Contents



September 30, 2008
    
    
    December 31, 2007Notional
    
    
    Fair
    
    
    Notional
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueCredit Swaps Sold-Single NameYear of Maturity2008
    
    $
    168,914
    
    
    $
    (71
    )
    
    $
    1,180,401
    
    
    $
    (302
    )2009
    
    
    2,627,579
    
    
    
    (28,490
    )
    
    
    2,723,618
    
    
    
    (6,449
    )2010
    
    
    5,822,265
    
    
    
    (157,385
    )
    
    
    6,052,998
    
    
    
    (56,037
    )2011
    
    
    2,893,998
    
    
    
    (159,072
    )
    
    
    2,953,911
    
    
    
    (53,905
    )2012
    
    
    5,123,797
    
    
    
    (185,071
    )
    
    
    5,309,725
    
    
    
    (60,119
    )2013
    
    
    1,162,554
    
    
    
    (16,228
    )
    
    
    40,000
    
    
    
    (126
    )Total
    
    $
    17,799,107
    
    
    $
    (546,317
    )
    
    $
    18,260,653
    
    
    $
    (176,938
    )Credit Swaps Sold-TrancheYear of Maturity2012
    
    $
    1,000,000
    
    
    $
    (32,799
    )
    
    $
    1,000,000
    
    
    $
    (6,204
    )2013
    
    
    350,000
    
    
    
    (112,219
    )
    
    
    350,000
    
    
    
    (58,715
    )2014
    
    
    3,650,000
    
    
    
    (570,337
    )
    
    
    3,350,000
    
    
    
    (255,137
    )Total
    
    $
    5,000,000
    
    
    $
    (715,355
    )
    
    $
    4,700,000
    
    
    $
    (320,056
    )Credit
Swaps Sold-ABS(1)Year of Maturity2010
    
    $
    10,000
    
    
    $
    (6,581
    )
    
    $
    10,000
    
    
    $
    (4,632
    )2011
    
    
    5,000
    
    
    
    (3,825
    )
    
    
    10,000
    
    
    
    (6,368
    )2012
    
    
    15,000
    
    
    
    (11,504
    )
    
    
    15,000
    
    
    
    (9,322
    )2013
    
    
    15,000
    
    
    
    (11,445
    )
    
    
    15,000
    
    
    
    (9,443
    )2014
    
    
    20,000
    
    
    
    (15,425
    )
    
    
    20,000
    
    
    
    (12,438
    )2016
    
    
    10,000
    
    
    
    (7,778
    )
    
    
    10,000
    
    
    
    (6,479
    )Total
    
    $
    75,000
    
    
    $
    (56,558
    )
    
    $
    80,000
    
    
    $
    (48,682
    )Credit Swaps Purchased-Single NameYear of Maturity2012
    
    $
    
    
    
    $
    
    
    
    $
    (5,000
    )
    
    $
    3832014
    
    
    (11,740
    )
    
    
    4,431
    
    
    
    (20,410
    )
    
    
    1,168Total
    
    $
    (11,740
    )
    
    $
    4,431
    
    
    $
    (25,410
    )
    
    $
    1,551
 (1) 
    
    See note 6 Credit Events  CDS on ABS of notes to condensed consolidated financial statements
for further discussion.  18




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



Quoted Pricesin
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significant
    
    
    
    
    
    Assets /for
    
    
    Observable
    
    
    Unobservable
    
    
    Counter-
    
    
    LiabilitiesIdentical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    party
    
    
    at Fair(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    Netting (*)
    
    
    ValueAssetsCash and cash equivalents
    
    $
    245,598
    
    
    $
    52,737
    
    
    $
    
    
    
    $
    
    
    
    $
    298,335Available-for-sale
investments
    
    
    
    
    
    
    609,718
    
    
    
    5,754
    
    
    
    
    
    
    
    615,472Unrealized gain on
credit swaps
    
    
    
    
    
    
    3,797
    
    
    
    
    
    
    
    (3,781
    )
    
    
    16Other assets
    
    
    
    
    
    
    1,186
    
    
    
    
    
    
    
    
    
    
    
    1,186Total Assets
    
    $
    245,598
    
    
    $
    667,438
    
    
    $
    5,754
    
    
    $
    (3,781
    )
    
    $
    915,009LiabilitiesUnrealized loss on
credit swaps
    
    $
    
    
    
    $
    545,683
    
    
    $
    771,913
    
    
    $
    (3,781
    )
    
    $
    1,313,815Total Liabilities
    
    $
    
    
    
    $
    545,683
    
    
    $
    771,913
    
    
    $
    (3,781
    )
    
    $
    1,313,815
 (*) 
    
    Represents the impact of counterparty netting across the levels of the fair value
hierarchy. Counterparty netting among positions classified within the same level is included in
that level.  Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2008
    
    
    September 30, 2008Available-for-
    
    
    Unrealized Loss
    
    
    Available-for-
    
    
    Unrealized LossSale
    
    
    on Credit
    
    
    Sale
    
    
    on CreditInvestments
    
    
    Swaps
    
    
    Investments
    
    
    SwapsBalance, beginning of period
    
    $
    6,782
    
    
    $
    (546,228
    )
    
    $
    9,657
    
    
    $
    (368,739
    )Realized losses
    
    
    (124
    )
    
    
    
    
    
    
    (124
    )
    
    
    4,876Unrealized losses
    
    
    (904
    )
    
    
    (225,685
    )
    
    
    (3,903
    )
    
    
    (408,050
    )Purchases, sales, issuances and settlements
    
    
    
    
    
    
    
    
    
    
    124
    
    
    
    Transfers in and/or out of Level 3, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, end of period
    
    $
    5,754
    
    
    $
    (771,913
    )
    
    $
    5,754
    
    
    $
    (771,913
    )
  22




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##### Table of Contents



Fair Value Option
  6. Credit Events
 Credit Swaps Sold -Single Name
    23




---



##### Table of Contents



Net RealizedNotional
    
    
    Losses onAmount
    
    
    Credit EventsSingle Name Reference EntityFederal National Mortgage Association (Fannie Mae)
    
    $
    80,000
    
    
    $
    1,758Federal Home Loan Mortgage Corporation (Freddie
Mac)
    
    
    110,000
    
    
    
    3,000Lehman Brothers Holdings Inc.
    
    
    80,000
    
    
    
    73,100Washington Mutual, Inc.
    
    
    10,130
    
    
    
    6,562Total
    
    $
    280,130
    
    
    $
    84,420
 Counterparty Default  Lehman Brothers Special Financing Inc.
  CDS on ABS
   24




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##### Table of Contents



7. Restructuring  Harrier Discontinuance
   8. Earnings (Loss) per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss available to common shareholders
    
    $
    (390,219
    )
    
    $
    (128,435
    )
    
    $
    (797,694
    )
    
    $
    (159,669
    )Weighted-average basic shares
outstanding
    
    
    45,230
    
    
    
    45,024
    
    
    
    45,187
    
    
    
    44,734Effect of dilutive instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Share options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted share units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dilutive potential shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted-average diluted shares
    
    
    45,230
    
    
    
    45,024
    
    
    
    45,187
    
    
    
    44,734Basic EPS
    
    $
    (8.63
    )
    
    $
    (2.85
    )
    
    $
    (17.65
    )
    
    $
    (3.57
    )Diluted EPS
    
    $
    (8.63
    )
    
    $
    (2.85
    )
    
    $
    (17.65
    )
    
    $
    (3.57
    )
  25




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##### Table of Contents



9. Share-Based Compensation
 Share-Based Payment
   September 30, 2008WeightedNumber
    
    
    Averageof
    
    
    ExerciseShares
    
    
    PriceOutstanding at December 31, 2007
    
    
    1,311,624
    
    
    $
    11.61Granted
    
    
    
    
    
    $
    Exercised
    
    
    
    
    
    $
    Forfeited
    
    
    (82,475
    )
    
    $
    11.84Outstanding at September 30, 2008
    
    
    1,229,149
    
    
    $
    11.60Exercisable at September 30, 2008
    
    
    591,450
    
    
    $
    11.20
  26




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##### Table of Contents



Share Options Outstanding
    
    
    Share Options ExercisableAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber
    
    
    Remaining
    
    
    Average
    
    
    Number
    
    
    Averageof
    
    
    Contractual
    
    
    Exercise
    
    
    of
    
    
    ExerciseRange of Exercise Prices
    
    Shares
    
    
    Life (Years)
    
    
    Price
    
    
    Shares
    
    
    Price$0.00  $6.94
    
    
    65,625
    
    
    
    4.4
    
    
    $
    6.94
    
    
    
    65,625
    
    
    $
    6.94$6.95  $9.76
    
    
    113,125
    
    
    
    5.4
    
    
    $
    9.76
    
    
    
    113,125
    
    
    $
    9.76$9.77  $13.50
    
    
    1,050,399
    
    
    
    4.8
    
    
    $
    12.08
    
    
    
    412,700
    
    
    $
    12.28Total
    
    
    1,229,149
    
    
    
    
    
    
    
    
    
    
    
    591,450
   10. Comprehensive Loss and Accumulated Other Comprehensive Loss
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (390,219
    )
    
    $
    (128,435
    )
    
    $
    (797,694
    )
    
    $
    (159,669
    )Foreign currency translation adjustments
    
    
    (108
    )
    
    
    28
    
    
    
    (169
    )
    
    
    23Change in net unrealized losses on
available-for-sale investments
    
    
    (3,022
    )
    
    
    (1,939
    )
    
    
    (5,401
    )
    
    
    (1,731
    )Total comprehensive loss
    
    $
    (393,349
    )
    
    $
    (130,346
    )
    
    $
    (803,264
    )
    
    $
    (161,377
    )
  27




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##### Table of Contents



September 30,
    
    
    December 31,2008
    
    
    2007Balance at beginning of period
    
    $
    (4,712
    )
    
    $
    (2,375
    )Foreign currency translation adjustments
    
    
    (169
    )
    
    
    (18
    )Change in net unrealized losses on available-for-sale investments
    
    
    (5,401
    )
    
    
    (2,319
    )Balance at end of period
    
    $
    (10,282
    )
    
    $
    (4,712
    )
 11. Subsequent Events
     28




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##### Table of Contents



29




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##### Table of Contents



Item 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following is a discussion and analysis of our financial condition and results of
operations. This discussion should be read in conjunction with our consolidated financial
statements and accompanying notes which appear in the Companys Annual Report on Form 10-K . It
contains forward-looking statements that involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking statements as a result of various
factors, including those discussed below and in the Companys Annual Report on Form 10-K ,
particularly under Item 1A Risk Factors and the heading Cautionary Note Regarding
Forward-Looking Statements.
 Business
  Primus Financial
    30




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##### Table of Contents



Primus Asset Management
  PRS Trading Strategies/Harrier
   31




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##### Table of Contents



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




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##### Table of Contents



Nonperformance Risk Adjustment
  Level 3 Assets and Liabilities
   Quoted Prices
 in
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significant
    
    
    
    
    
    
    Assets /for
    
    
    Observable
    
    
    Unobservable
    
    
    Counter-
    
    
    LiabilitiesIdentical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    party
    
    
    at Fair(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    Netting (*)
    
    
    ValueTotal assets
    
    $
    245,598
    
    
    $
    667,438
    
    
    $
    5,754
    
    
    $
    (3,781
    )
    
    $
    915,009Percentage of total
assets measured at
fair value
    
    
    26.8
    %
    
    
    73.0
    %
    
    
    0.6
    %
    
    
    (0.4
    %)
    
    
    100
    %Total liabilities
    
    $
    
    
    
    $
    545,683
    
    
    $
    771,913
    
    
    $
    (3,781
    )
    
    $
    1,313,815Percentage of total
liabilities
measured at fair
value
    
    
    
    
    
    
    41.5
    %
    
    
    58.8
    %
    
    
    (0.3
    %)
    
    
    100
    %
  33




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



Income Taxes
 Income Taxes
  Results of Operations
 Three Months Ended September 30, 2008 Compared With Three Months Ended September 30, 2007
 Overview
    36




---



##### Table of Contents



Credit Events
 Credit Swaps Sold -Single Name
   37




---



##### Table of Contents



Net RealizedNotional
    
    
    Losses onAmount
    
    
    Credit EventsSingle Name Reference EntityFederal National Mortgage Association (Fannie Mae)
    
    $
    80,000
    
    
    $
    1,758Federal Home Loan Mortgage Corporation (Freddie
Mac)
    
    
    110,000
    
    
    
    3,000Lehman Brothers Holdings Inc.
    
    
    80,000
    
    
    
    73,100Washington Mutual, Inc.
    
    
    10,130
    
    
    
    6,562Total
    
    $
    280,130
    
    
    $
    84,420
 Counterparty Default  Lehman Brothers Special Financing Inc.
   38




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##### Table of Contents



CDS on ABS
   Net Credit Swap Loss
   Three Months EndedSeptember 30,2008
    
    
    2007Primus Financial
    
    $
    (387,683
    )
    
    $
    (117,464
    )Harrier/PRS Trading
    
    
    
    
    
    
    (2,658
    )Total consolidated net credit swap loss
    
    $
    (387,683
    )
    
    $
    (120,122
    )
  39




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##### Table of Contents



Net Credit Swap Loss  Primus Financial
   
    
    Net premiums earned;
    
    Net realized gains (losses) on credit swaps, which include gain (losses) on terminated
credit swaps sold, payments to settle credit events and estimated losses on credit events
during the period; and
    
    Net unrealized gains (losses) on credit swaps.
  Three Months EndedSeptember 30,2008
    
    
    2007Net premiums earned
    
    $
    24,378
    
    
    $
    22,316Net realized gains (losses) on credit swaps
    
    
    (84,415
    )
    
    
    1,040Net unrealized losses on credit swaps
    
    
    (327,646
    )
    
    
    (140,820
    )Total net credit swap loss
    
    $
    (387,683
    )
    
    $
    (117,464
    )
 Net Premiums Earned  Primus Financial
   
    
    Premium income on single name credit swaps sold;
    
    Premium income on tranches sold;
    
    Premium expense on credit swaps sold on asset-backed securities (ABS); and
    
    Net premium income on credit swaps undertaken to offset credit risk.
  40




---



##### Table of Contents



Three Months EndedSeptember 30,2008
    
    
    2007Premium income on single name credit swaps sold
    
    $
    18,959
    
    
    $
    17,723Premium income on tranches sold
    
    
    5,202
    
    
    
    4,328Premium income on credit swaps sold on ABS
    
    
    262
    
    
    
    283Net premium expense on credit swaps undertaken
to offset credit risk
    
    
    (45
    )
    
    
    (18
    )Total net premiums earned
    
    $
    24,378
    
    
    $
    22,316
    Net
Realized Gains (Losses) on Credit Swaps  Primus Financial
  Three Months EndedSeptember 30,2008
    
    
    2007Realized gains on terminated credit swaps sold
    
    $
    4
    
    
    $
    1,184Net realized losses on credit events
    
    
    (84,419
    )Realized losses on terminated credit swaps sold
    
    
    
    
    
    
    (17
    )Net realized losses on terminated credit swaps
undertaken to offset credit risk
    
    
    
    
    
    
    (127
    )Total net realized gains (losses) on credit swaps
    
    $
    (84,415
    )
    
    $
    1,040
  41




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##### Table of Contents



Net
Unrealized Gains (Losses) on Credit Swaps  Primus Financial
  Three Months EndedSeptember 30,2008
    
    
    2007Net unrealized losses on credit swaps sold
    
    $
    (103,202
    )
    
    $
    (65,137
    )Net unrealized losses on tranches sold
    
    
    (226,310
    )
    
    
    (52,457
    )Net unrealized gains (losses) on credit swaps sold on ABS
    
    
    625
    
    
    
    (22,731
    )Net unrealized gains (losses) on credit swaps undertaken
to offset credit risk
    
    
    1,241
    
    
    
    (495
    )Total net unrealized losses on credit swaps
    
    $
    (327,646
    )
    
    $
    (140,820
    )
  42




---



##### Table of Contents



Asset Management and Advisory Fees
    Interest Income
    Three Months EndedSeptember 30,2008
    
    
    2007Interest income
    
    $
    6,212
    
    
    $
    10,881Cash and cash equivalents
    
    $
    298,335
    
    
    $
    265,439Available-for-sale and trading account securities
    
    
    615,472
    
    
    
    617,815Total cash, cash equivalents, available-for-sale
and trading account securities
    
    $
    913,807
    
    
    $
    883,254
  43




---



##### Table of Contents



Other Trading Revenue (Loss)
  Foreign currency revaluation loss
  Operating Expenses
  Three Months EndedSeptember 30,2008
    
    
    2007Compensation and employee benefits
    
    $
    1,739
    
    
    $
    4,890Professional and legal fees
    
    
    796
    
    
    
    1,355Depreciation and amortization
    
    
    336
    
    
    
    387Technology and data
    
    
    854
    
    
    
    1,286Other
    
    
    596
    
    
    
    1,469Total operating expenses
    
    $
    4,321
    
    
    $
    9,387Number of full-time employees, at end of period
    
    
    52
    
    
    
    62
   44




---



##### Table of Contents



Interest Expense and Preferred Distributions
     Income Taxes
   45




---



##### Table of Contents



Nine Months Ended September 30, 2008 Compared With Nine Months Ended September 30, 2007
 Overview
  Net Credit Swap Loss
   Nine Months EndedSeptember 30,2008
    
    
    2007Primus Financial
    
    $
    (781,020
    )
    
    $
    (136,630
    )Harrier/PRS Trading
    
    
    712
    
    
    
    (4,364
    )Total consolidated net credit swap loss
    
    $
    (780,308
    )
    
    $
    (140,994
    )
   46




---



##### Table of Contents



Net
Credit Swap Loss  Primus Financial
   
    
    Net premiums earned;
    
    Net realized gains (losses) on credit swaps, which include gain (losses) on terminated
credit swaps sold and estimated losses on credit events during the period; and
    
    Net unrealized gains (losses) on credit swaps.
  Nine Months EndedSeptember 30,2008
    
    
    2007Net premiums earned
    
    $
    78,912
    
    
    $
    60,893Net realized losses on credit swaps
    
    
    (90,162
    )
    
    
    810Net unrealized losses on credit swaps
    
    
    (769,770
    )
    
    
    (198,333
    )Total net credit swap loss
    
    $
    (781,020
    )
    
    $
    (136,630
    )
 Net
Premiums Earned  Primus Financial
  
    
    Premium income on single name credit swaps sold;
    
    Premium income on tranches sold;
    
    Premium income on credit swaps sold on asset-backed securities (ABS); and
    
    Net premium income on credit swaps undertaken to offset credit risk.
  Nine Months EndedSeptember 30,2008
    
    
    2007Premium income on single name credit swaps sold
    
    $
    62,652
    
    
    $
    52,131Premium income on tranches sold
    
    
    15,472
    
    
    
    8,329Premium income on credit swaps sold on ABS
    
    
    815
    
    
    
    451Net premium expense on credit swaps undertaken
to offset credit risk
    
    
    (27
    )
    
    
    (18
    )Total net premiums earned
    
    $
    78,912
    
    
    $
    60,893
  47




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##### Table of Contents



Net Realized Gains (Losses) on Credit Swaps  Primus Financial
  Nine Months EndedSeptember 30,2008
    
    
    2007Realized gains on terminated credit swaps sold
    
    $
    28
    
    
    $
    3,197Net realized losses on credit events
    
    
    (89,295
    )Realized losses on terminated credit swaps sold
    
    
    (900
    )
    
    
    Net realized gains (losses) on terminated credit
swaps undertaken to offset credit risk
    
    
    5
    
    
    
    (2,387
    )Total net realized gains (losses) on credit swaps
    
    $
    (90,162
    )
    
    $
    810
   48




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##### Table of Contents



Net Unrealized Gains (Losses) on Credit Swaps  Primus Financial
  Nine Months EndedSeptember 30,2008
    
    
    2007Net unrealized losses on credit swaps sold
    
    $
    (368,590
    )
    
    $
    (86,496
    )Net unrealized losses on tranches sold
    
    
    (395,299
    )
    
    
    (82,762
    )Net unrealized losses on credit swaps sold on ABS
    
    
    (7,876
    )
    
    
    (28,580
    )Net unrealized gains (losses) on credit swaps
undertaken to offset credit risk
    
    
    1,995
    
    
    
    (495
    )Total net unrealized losses on credit swaps
    
    $
    (769,770
    )
    
    $
    (198,333
    )
  Asset Management and Advisory Fees
    Interest Income
    49




---



##### Table of Contents



Nine Months EndedSeptember 30,2008
    
    
    2007Interest income
    
    $
    21,725
    
    
    $
    31,174Cash and cash equivalents
    
    $
    298,335
    
    
    $
    265,439Available-for-sale and trading account securities
    
    
    615,472
    
    
    
    617,815Total cash, cash equivalents, available-for-sale
and trading account securities
    
    $
    913,807
    
    
    $
    883,254
 Other Trading Revenue (Loss)
  Foreign currency revaluation loss
  Operating Expenses
  Nine Months EndedSeptember 30,2008
    
    
    2007Compensation and employee benefits
    
    $
    13,894
    
    
    $
    16,866Professional and legal fees
    
    
    3,100
    
    
    
    3,794Depreciation and amortization
    
    
    999
    
    
    
    1,334Technology and data
    
    
    2,865
    
    
    
    3,241Other
    
    
    3,219
    
    
    
    4,414Total operating expenses
    
    $
    24,077
    
    
    $
    29,649Number of full-time employees, at end of period
    
    
    52
    
    
    
    62
  50




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Interest Expense and Preferred Distributions
      51




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Income Taxes
  Non-GAAP Financial Measures  Economic Results
   
    
    Unrealized gains (losses) on credit swaps sold by Primus Financial are excluded from
GAAP net income (loss);
    
    Realized gains from early termination of credit swaps sold by Primus Financial are
excluded from GAAP net income (loss) and;
    
    Realized gains from early termination of credit swaps sold by Primus Financial are
amortized over the period that would have been the remaining life of the credit swap, and
that amortization is added to GAAP net income (loss);
    
    Provision for credit events. Commencing with the third quarter of 2008,
the Company will make provisions for credit events only in the period in which the
event occurs, a change from our previous practice.
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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007GAAP net loss
    
    $
    (390,219
    )
    
    $
    (128,435
    )
    
    $
    (797,694
    )
    
    $
    (159,669
    )Adjustments:Less: Change in unrealized fair value of credit
swaps sold (gain) loss by Primus Financial
    
    
    327,646
    
    
    
    140,820
    
    
    
    769,770
    
    
    
    198,333Less: Realized gains from early termination of
credit swaps sold by Primus Financial
    
    
    (4
    )
    
    
    (1,182
    )
    
    
    (28
    )
    
    
    (3,197
    )Add: Amortization of realized gains from the
early termination of credit swaps sold by Primus
Financial
    
    
    466
    
    
    
    1,399
    
    
    
    1,746
    
    
    
    5,232Less: Provision for credit events
    
    
    
    
    
    
    
    
    
    
    (189
    )
    
    
    Add: Deduction against provision for credit events
    
    
    
    
    
    
    
    
    
    
    4,875
    
    
    
    Net Economic Results
    
    $
    (62,111
    )
    
    $
    12,602
    
    
    $
    (21,520
    )
    
    $
    40,699Economic Results per diluted share
    
    $
    (1.37
    )
    
    $
    0.28
    
    
    $
    (0.48
    )
    
    $
    0.90Economic Results weighted average common shares
outstanding  diluted
    
    
    45,230
    
    
    
    45,206
    
    
    
    45,187
    
    
    
    45,130
   53




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Off-Balance Sheet Arrangements
  Contractual Obligations
  Payment Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsProperty leases
    
    $
    8,911
    
    
    $
    1,236
    
    
    $
    2,471
    
    
    $
    2,413
    
    
    $
    2,7917% senior notes
    
    
    125,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,000Interest on 7% senior notes (b)
    
    
    247,090
    
    
    
    8,750
    
    
    
    17,500
    
    
    
    17,500
    
    
    
    203,340Subordinated deferrable interest notes
    
    
    200,000
    
    
    
    
    (a)
    
    
    
    (a)
    
    
    
    (a)
    
    
    200,000Total
    
    $
    581,001
    
    
    $
    9,986
    
    
    $
    19,971
    
    
    $
    19,913
    
    
    $
    531,131
 (a)
    
    Payments on the subordinated deferrable interest notes for the next five years cannot be
determined, as the notes are auction rate obligations.(b)
    
    Net interest payments on the $125 million, 7% senior notes will vary due to the interest rate
swap agreement. Property leases:
  Liquidity and Capital Resources
 Capital Strategy
    54




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Cash Flow
 Cash flows from operating activities 
 Cash flows from investing activities 
 Cash flows from financing activities 
  Recent Accounting Pronouncements
  The Fair Value Option for Financial Assets and
Liabilities
  55




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Disclosures about Derivative Instruments and
Hedging Activities, an Amendment of FASB Statement No. 133 Accounting for Derivative Instruments and Hedging Activities
 Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133
and FASB Interpretation No. 45
 Subsequent Events
    56




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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 and capital markets;
    
    the level of activity in the leveraged buyout and private equity markets;
    
    competitive conditions and pricing levels;
    
    change in rating agency requirements or methodology;
    
    counterparty limits and risk;
    
    legislative and regulatory developments;
    
    technological developments;
    
    changes in tax laws;
    
    changes in international or national political or economic conditions,
including any terrorist attacks;
    
    uncertainties that have not been identified at this time.
   58




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Item 3. Quantitative and Qualitative Disclosures about Market Risk
     59




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Item 4. Controls and Procedures
   
 Part II. Other Information
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
   60




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Item 6. Exhibits
 12
    
    
    Ratio of Earnings to Combined Fixed Charges and Preferred Share Dividend Requirements31.1
    
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
200231.2
    
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
200232
    
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
  61




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SIGNATURES
  PRIMUS GUARANTY, LTD./s/ Richard ClaidenRichard ClaidenChief Financial Officer

(Duly Authorized Officer and 
Principal Financial
Officer)   62




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EXHIBIT INDEX
 Exhibit No.
    
    Description12
    
    
    Ratio of Earnings to Combined Fixed Charges and Preferred Share Dividend Requirements31.1
    
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
200231.2
    
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
200232
    
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
  63