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UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C.20549

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FORM 10-Q

[X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterlyperiod ended September 30, 2005

OR

[  ]    TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For thetransition period from                 to                .

Commission File Number: 001-32307

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Primus Guaranty,Ltd.

(Exact name of registrant as specified inits charter)

|                                                             |  |                                     |  |  |  |  |
|-------------------------------------------------------------|--|-------------------------------------|--|--|--|--|
| Bermuda                                                     |  | NotRequired                         |
| (State orother jurisdiction ofincorporation ororganization) |  | (I.R.S. Employer IdentificationNo.) |
|                                                             |

Clarendon House 2 Church StreetHamilton HM 11, Bermuda(Address of principal executiveoffices, including zip code)

441-296-0519(Registrant's telephone number, including area code)

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Indicate by check markwhether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.    Yes       No   

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act).    Yes       No   

As of November 5,2005, the number of shares outstanding of the issuer's commonstock, $0.08 par value, was43,140,288.

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Primus Guaranty, Ltd.Form 10-QFor the quarter ended September 30, 2005

|                                |  |                                                                                                         |        |        |        |        |  |  |  |  |
|--------------------------------|--|---------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--|--|--|--|
| **PartI.**                     |  | **FinancialInformation**                                                                                |        |   |   |   |
| Item 1.                        |  | FinancialStatements                                                                                     |        |   |   |   |
|                           |  | Consolidated Statements ofFinancial Condition September 30, 2005 (Unaudited) and December31, 2004       |        |   | 3      |   |
|                           |  | Consolidated Statementsof Operations (Unaudited) Three and nine months ended September30, 2005 and 2004 |        |   | 4      |   |
|                           |  | ConsolidatedStatements of Cash Flows (Unaudited) Nine months ended September30, 2005 and 2004           |        |   | 5      |   |
|                           |  | Notes toConsolidated Financial Statements                                                               |        |   | 6      |   |
| Item2.                         |  | Management's Discussion and Analysis of FinancialCondition and Results of Operations                    |        |   | 19     |   |
|                           |  | Cautionary Note Regarding Forward-LookingStatements                                                     |        |   | 33     |   |
| Item 3.                        |  | Quantitativeand Qualitative Disclosures about Market Risk                                               |        |   | 34     |   |
| Item 4.                        |  | Controls and Procedures                                                                                 |        |   | 35     |   |
| **Part II. Other Information** |  |                                                                                                    |   |   |
| Item 1.                        |  | Legal Proceedings                                                                                       |        |   | 35     |   |
| Item 2.                        |  | Unregistered Sales of Equity Securities andUse of Proceeds                                              |        |   | 35     |   |
| Item 3.                        |  | Defaultsupon Senior Securities                                                                          |        |   | 36     |   |
| Item4.                         |  | Submission of Matters to a Vote of SecurityHolders                                                      |        |   | 36     |   |
| Item 5.                        |  | OtherInformation                                                                                        |        |   | 36     |   |
| Item6.                         |  | Exhibits                                                                                                |        |   | 36     |   |
| Signatures                     |  |                                                                                                    | 37     |   |
|                                |

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PartI.    Financial Information

Item1.    Financial Statements

Primus Guaranty, Ltd.Consolidated Statements of Financial Condition(dollars in 000sexcept per shareamounts)

|                                                                                                                                                                            |  |                  |         |                 |  |        |         |        |  |  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|------------------|---------|-----------------|--|--------|---------|--------|--|--|
|                                                                                                                                                                       |  | September30,2005 |         | December31,2004 |
|                                                                                                                                                                       |  | (unaudited)      |         |            |
| **Assets**                                                                                                                                                                 |  |             |    |            |  |   |    |   |
| Cashand cashequivalents                                                                                                                                                    |  | $                | 80,951  |            |  | $      | 320,989 |   |
| Available-for-saleinvestments                                                                                                                                              |  |             | 416,597 |            |  |   | 161,101 |   |
| Accruedinterestreceivable                                                                                                                                                  |  |             | 4,135   |            |  |   | 1,381   |   |
| Accruedpremiums on creditswaps                                                                                                                                             |  |             | 3,198   |            |  |   | 3,349   |   |
| Premiumsreceivable on creditswaps                                                                                                                                          |  |             | 160     |            |  |   | 197     |   |
| Premiums receivable onfinancial guarantees                                                                                                                                 |  |             | 400     |            |  |   | 800     |   |
| Assetmanagement feereceivable                                                                                                                                              |  |             | 3       |            |  |   | 15      |   |
| Prepaidexpenses                                                                                                                                                            |  |             | 524     |            |  |   | 868     |   |
| Unrealized gain oncredit swaps, at fairvalue                                                                                                                               |  |             | 29,157  |            |  |   | 46,517  |   |
| Fixed assets,less accumulated depreciation of $693 in 2005 and $493 in2004                                                                                                 |  |             | 1,627   |            |  |   | 1,800   |   |
| Internal usesoftware costs, less accumulated amortization of $7,267 in 2005and $5,893 in2004                                                                               |  |             | 3,415   |            |  |   | 4,297   |   |
| Income taxreceivable                                                                                                                                                       |  |             | 279     |            |  |   | 279     |   |
| Debt issuancecosts                                                                                                                                                         |  |             | 1,124   |            |  |   | 1,125   |   |
| Totalassets                                                                                                                                                                |  | $                | 541,570 |            |  | $      | 542,718 |   |
|                                                                                                                                                                       |  |             |    |            |  |   |    |   |
| **Liabilities,preferred securities of subsidiary and shareholders'equity**                                                                                                 |  |             |    |            |  |   |    |   |
| Accounts payable andaccruedexpenses                                                                                                                                        |  | $                | 1,798   |            |  | $      | 904     |   |
| Compensationaccrual                                                                                                                                                        |  |             | 3,916   |            |  |   | 5,317   |   |
| Brokerage feespayable                                                                                                                                                      |  |             | 6       |            |  |   | 14      |   |
| Taxespayable                                                                                                                                                               |  |             | 220     |            |  |   | 12      |   |
| Interestpayable                                                                                                                                                            |  |             | 95      |            |  |   | 364     |   |
| Long-termdebt                                                                                                                                                              |  |             | 75,000  |            |  |   | 75,000  |   |
| Unrealized losson credit swaps, at fairvalue                                                                                                                               |  |             | 1,737   |            |  |   | 259     |   |
| Deferred rentpayable                                                                                                                                                       |  |             | 435     |            |  |   | 455     |   |
| Deferred financialguarantee premiums                                                                                                                                       |  |             | 506     |            |  |   | 806     |   |
| Deferredcredit swappremiums                                                                                                                                                |  |             | 51      |            |  |   | 69      |   |
| Totalliabilities                                                                                                                                                           |  |             | 83,764  |            |  |   | 83,200  |   |
| Preferredsecurities ofsubsidiary                                                                                                                                           |  |             | 98,521  |            |  |   | 98,521  |   |
| Shareholders'equity:                                                                                                                                                       |  |             |    |            |  |   |    |   |
| Commonstock, $0.08 par value, 62,500,000 shares authorized, 43,120,989 and42,780,033 shares issued and outstanding at September 30, 2005 andDecember 31, 2004,respectively |  |             | 3,682   |            |  |   | 3,535   |   |
| Additionalpaid-in-capital                                                                                                                                                  |  |             | 264,698 |            |  |   | 264,860 |   |
| Warrants                                                                                                                                                                   |  |             | 612     |            |  |   | 612     |   |
| Accumulatedother comprehensiveloss                                                                                                                                         |  |             | (2,670  | )          |  |   | — |   |
| Retainedearnings                                                                                                                                                           |  |             | 92,963  |            |  |   | 91,990  |   |
| Totalshareholders'equity                                                                                                                                                   |  |             | 359,285 |            |  |   | 360,997 |   |
|                                                                                                                                                                       |  |             |    |            |  |   |    |   |
| Totalliabilities, preferred securities of subsidiary and shareholders'equity                                                                                               |  | $                | 541,570 |            |  | $      | 542,718 |   |
|                                                                                                                                                                            |

Seeaccompanying notes.

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Primus Guaranty, Ltd. ConsolidatedStatements of Operations(amounts in 000s except per shareamounts)

|                                                   |  |                                |         |                               |  |        |         |         |  |        |         |         |  |        |         |         |  |  |
|---------------------------------------------------|--|--------------------------------|---------|-------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                              |  | ThreeMonths EndedSeptember 30, |         | Nine Months EndedSeptember30, |
|                                              |  | 2005                           |         | 2004                          |  | 2005   |         | 2004    |
|                                              |  | (unaudited)                    |
| Revenues                                          |  |                           |    |                          |  |   |    |    |  |   |    |    |  |   |    |    |
| Netcredit swaprevenue                             |  | $                              | 27,449  |                          |  | $      | 23,331  |    |  | $      | 15,672  |    |  | $      | 26,166  |    |
| Premiumsearned on financialguarantees             |  |                           | 101     |                          |  |   | 99      |    |  |   | 300     |    |  |   | 295     |    |
| Investmentportfolio realizedgains/(losses)        |  |                           | (3      | )                        |  |   | — |    |  |   | 20      |    |  |   | — |    |
| Interestincome on investmentportfolio             |  |                           | 4,483   |                          |  |   | 1,166   |    |  |   | 10,969  |    |  |   | 2,534   |    |
| Rentalincome                                      |  |                           | — |                          |  |   | — |    |  |   | — |    |  |   | 40      |    |
| Assetmanagementfees                               |  |                           | 49      |                          |  |   | 3       |    |  |   | 140     |    |  |   | 3       |    |
| Foreigncurrencyrevaluation                        |  |                           | 55      |                          |  |   | 66      |    |  |   | (1,464  | )  |  |   | (40     | )  |
| Totalnetrevenues                                  |  |                           | 32,134  |                          |  |   | 24,665  |    |  |   | 25,637  |    |  |   | 28,998  |    |
|                                              |  |                           |    |                          |  |   |    |    |  |   |    |    |  |   |    |    |
| Expenses                                          |  |                           |    |                          |  |   |    |    |  |   |    |    |  |   |    |    |
| Employeecompensation andbenefits                  |  |                           | 3,537   |                          |  |   | 3,858   |    |  |   | 12,139  |    |  |   | 11,142  |    |
| Professionaland legalfees                         |  |                           | 981     |                          |  |   | 382     |    |  |   | 2,731   |    |  |   | 1,160   |    |
| Fixedasset depreciation andamortization           |  |                           | 533     |                          |  |   | 494     |    |  |   | 1,574   |    |  |   | 1,453   |    |
| Technologyanddata                                 |  |                           | 535     |                          |  |   | 243     |    |  |   | 1,250   |    |  |   | 914     |    |
| Rent                                              |  |                           | 191     |                          |  |   | 193     |    |  |   | 567     |    |  |   | 550     |    |
| Bankand investment managementfees                 |  |                           | 203     |                          |  |   | 275     |    |  |   | 660     |    |  |   | 438     |    |
| Ratingagencyfees                                  |  |                           | 61      |                          |  |   | 151     |    |  |   | 216     |    |  |   | 289     |    |
| Brokerageexpense                                  |  |                           | 18      |                          |  |   | 151     |    |  |   | 107     |    |  |   | 515     |    |
| Interestexpense                                   |  |                           | 649     |                          |  |   | 375     |    |  |   | 1,640   |    |  |   | 375     |    |
| Other                                             |  |                           | 332     |                          |  |   | 136     |    |  |   | 873     |    |  |   | 579     |    |
| Totalexpenses                                     |  |                           | 7,040   |                          |  |   | 6,258   |    |  |   | 21,757  |    |  |   | 17,415  |    |
| Distributionson preferred securities ofsubsidiary |  |                           | (1,022  | )                        |  |   | (403    | )  |  |   | (2,797  | )  |  |   | (1,550  | )  |
| Incomebefore provision for incometaxes            |  |                           | 24,072  |                          |  |   | 18,004  |    |  |   | 1,083   |    |  |   | 10,033  |    |
| Benefit/(Provision)for incometaxes                |  |                           | (63     | )                        |  |   | 22      |    |  |   | (108    | )  |  |   | (95     | )  |
| **Netincome available to commonshares**           |  | $                              | 24,009  |                          |  | $      | 18,026  |    |  | $      | 975     |    |  | $      | 9,938   |    |
|                                              |  |                           |    |                          |  |   |    |    |  |   |    |    |  |   |    |    |
| Earningsper commonshare:                          |  |                           |    |                          |  |   |    |    |  |   |    |    |  |   |    |    |
| Basic                                             |  | $                              | 0.56    |                          |  | $      | 4.23    |    |  | $      | 0.02    |    |  | $      | 2.57    |    |
| Diluted                                           |  | $                              | 0.54    |                          |  | $      | 0.51    |    |  | $      | 0.02    |    |  | $      | 0.28    |    |
| Averagecommon sharesoutstanding:                  |  |                           |    |                          |  |   |    |    |  |   |    |    |  |   |    |    |
| Basic                                             |  |                           | 43,120  |                          |  |   | 4,264   |    |  |   | 43,147  |    |  |   | 3,866   |    |
| Diluted                                           |  |                           | 44,543  |                          |  |   | 35,219  |    |  |   | 44,673  |    |  |   | 35,081  |    |
|                                                   |

Seeaccompanying notes.

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Primus Guaranty, Ltd. ConsolidatedStatements of Cash Flows(dollars in000s)

|                                                                                 |  |                              |          |         |  |        |         |         |  |  |
|---------------------------------------------------------------------------------|--|------------------------------|----------|---------|--|--------|---------|---------|--|--|
|                                                                            |  | Ninemonths endedSeptember30, |
|                                                                            |  | 2005                         |          | 2004    |
|                                                                            |  | (unaudited)                  |
| Cashflows from operatingactivities                                              |  |                         |     |    |  |   |    |    |
| Netincome                                                                       |  | $                            | 975      |    |  | $      | 9,938   |    |
| Adjustmentsto reconcile net income to net cash provided by operatingactivities: |  |                         |     |    |  |   |    |    |
| Non-cashitems included in netincome:                                            |  |                         |     |    |  |   |    |    |
| Depreciationof fixed assets                                                     |  |                         | 200      |    |  |   | 167     |    |
| Amortizationof internal use software costs                                      |  |                         | 1,374    |    |  |   | 1,286   |    |
| Stock compensation                                                              |  |                         | 2,149    |    |  |   | 2,095   |    |
| Net unrealized loss oncredit swapportfolio                                      |  |                         | 18,837   |    |  |   | 10,412  |    |
| Unrealizedloss onsublease                                                       |  |                         | —  |    |  |   | (39     | )  |
| Deferredrent                                                                    |  |                         | (20      | )  |  |   | (13     | )  |
| Amortization of debtissuancecosts                                               |  |                         | 31       |    |  |   | — |    |
| Distributionson preferred securities ofsubsidiary                               |  |                         | 2,798    |    |  |   | 1,550   |    |
| Increase(decrease) in cash resulting from changesin:                            |  |                         |     |    |  |   |    |    |
| Premiums receivable on creditswaps                                              |  |                         | 37       |    |  |   | 112     |    |
| Accrued premiums oncredit swaps                                                 |  |                         | 151      |    |  |   | 174     |    |
| Deferred creditswap premiums                                                    |  |                         | (17      | )  |  |   | (38     | )  |
| Deferredfinancial guaranteepremiums                                             |  |                         | (299     | )  |  |   | (295    | )  |
| Brokerage feespayable                                                           |  |                         | (8       | )  |  |   | (14     | )  |
| Accrued interestreceivable                                                      |  |                         | (2,754   | )  |  |   | (263    | )  |
| Premiumsreceivable on financialguarantees                                       |  |                         | 400      |    |  |   | 401     |    |
| Prepaidexpenses                                                                 |  |                         | 344      |    |  |   | (712    | )  |
| Other                                                                           |  |                         | —  |    |  |   | 527     |    |
| Assetmanagement feereceivable                                                   |  |                         | 12       |    |  |   | — |    |
| Accountspayable and accruedexpenses                                             |  |                         | 889      |    |  |   | 188     |    |
| Compensationaccrual                                                             |  |                         | (1,400   | )  |  |   | (995    | )  |
| Interestpayable                                                                 |  |                         | (269     | )  |  |   | 375     |    |
| Taxespayable.                                                                   |  |                         | 208      |    |  |   | 50      |    |
| Netcash provided by operatingactivities                                         |  |                         | 23,638   |    |  |   | 24,906  |    |
| Cashflows from investingactivities                                              |  |                         |     |    |  |   |    |    |
| Fixed assetpurchases.                                                           |  |                         | (27      | )  |  |   | (125    | )  |
| Net sale(purchase) ofinvestments.                                               |  |                         | (258,165 | )  |  |   | 539     |    |
| Otherassetpurchases                                                             |  |                         | (492     | )  |  |   | (440    | )  |
| Netcash used in investingactivities                                             |  |                         | (258,684 | )  |  |   | (26     | )  |
| Cashflows from financingactivities                                              |  |                         |     |    |  |   |    |    |
| Retirement of commonshares                                                      |  |                         | (2,397   | )  |  |   | — |    |
| Proceeds fromlong term subordinated debt issuance ofsubsidiary                  |  |                         | —  |    |  |   | 75,000  |    |
| Proceedsfrom issuance of commonshares                                           |  |                         | 234      |    |  |   | — |    |
| Debt issuancecosts                                                              |  |                         | (31      | )  |  |   | (958    | )  |
| Initial publicofferingcosts                                                     |  |                         | —  |    |  |   | (3,300  | )  |
| Exercise ofwarrants                                                             |  |                         | —  |    |  |   | 5,500   |    |
| Net preferreddistributions ofsubsidiary                                         |  |                         | (2,798   | )  |  |   | (1,550  | )  |
| Netcash (used in)/ provided by financingactivities                              |  |                         | (4,992   | )  |  |   | 74,692  |    |
| Net(decrease)/ increase incash                                                  |  |                         | (240,038 | )  |  |   | 99,572  |    |
| Cash and cashequivalents at beginning ofperiod                                  |  |                         | 320,989  |    |  |   | 257,967 |    |
| Cashand cash equivalents at end ofperiod                                        |  | $                            | 80,951   |    |  | $      | 357,539 |    |
| Supplementaldisclosures                                                         |  |                         |     |    |  |   |    |    |
| Cash paid forinterest                                                           |  | $                            | 1,879    |    |  | $      | — |    |
| Cash paidfortaxes                                                               |  | $                            | 4        |    |  | $      | 44      |    |
|                                                                                 |

Seeaccompanying notes.

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsSeptember 30,2005

1.    Organization and Basis ofPresentation

Primus Guaranty, Ltd. ("PrimusGuaranty" or the "Company"), isa Bermuda holding company and the 100% owner of Primus(Bermuda), Ltd. ("Primus Bermuda"), also aBermuda holding company. The Company considers its legal domicile to bewhere it is incorporated, Bermuda. Primus Bermuda is the 100%owner of Primus Group Holdings, LLC ("Primus GroupHoldings"), a Delaware limited liability company. PrimusGroup Holdings has two principal operating subsidiaries: PrimusFinancial Products, LLC ("Primus Financial"),and Primus Asset Management, Inc. ("Primus AssetManagement"). Primus Financial is a Delaware limitedliability company that maintains a long-term counterparty credit ratingof AAA from Standard & Poor's Rating Services("S&P") and Aaa from Moody'sInvestors Service, Inc. ("Moody's" and,together with S&P, the "RatingAgencies"). Primus Financial is primarily a provider ofcredit risk protection in the form of credit swaps, covering singlename, corporate and sovereign financial obligations. Primus Financialalso sells credit protection referencing portfolios containingobligations of multiple reference entities, or tranches. Primus AssetManagement is a provider of administrative and technology support toPrimus Financial and an asset manager for Primus Financial and thirdparties.

Primus Financial and Primus Asset Management functionas separate entities from Primus Group Holdings. Additionally, theobligations of Primus Financial are not the obligations of PrimusBermuda, Primus Group Holdings, or any other of its affiliates, andvice versa. Primus Asset Management wholly owns Primus Re, Ltd.("Primus Re"), a Bermuda company thatoperates as a financial guarantee insurance company and is licensed asa Class 3 Insurer under the Insurance Act of 1978 of Bermuda.

The accompanying unaudited consolidated financial statements ofPrimus Guaranty, Ltd. have been prepared in accordance with U.S.generally accepted accounting principles for interim financialinformation and with the instructions to Form 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the informationand footnotes required by generally accepted accounting principles forcomplete financial statements. In the opinion of management, alladjustments (consisting of normal recurring accruals) considerednecessary for a fair presentation have been included. Operating resultsfor the periods presented are not necessarily indicative of the resultsthat may be expected for any other interim period or for the year endedDecember 31, 2005. The consolidated financial statements include theaccounts of the Company and its wholly owned subsidiaries. Allsignificant intercompany balances have been eliminated.

Theconsolidated financial statements represent a single reportablesegment, as defined in Statement of Financial Accounting Standards("SFAS") No. 131, Disclosures aboutSegments of an Enterprise and Related Information.

Theconsolidated financial statements are presented in U.S. dollarequivalents. At September 30, 2005 and December 31, 2004, PrimusFinancial's credit swap activities were conducted in U.S. dollarsand Euros.

Certain 2004 amounts have been reclassified to beconsistent with the 2005 presentation.

2.    Summary ofSignificant Accounting Policies

Credit swaps

Creditswaps are over-the-counter ("OTC") derivativefinancial instruments and are recorded at fair value in accordance withSFAS No. 133, Accounting for Derivative Instruments and HedgingActivities. Obtaining the fair value (as such term is defined inSFAS No. 133) for such instruments requires the use of managementjudgment. These instruments are valued using pricing models based onthe net present value of expected future cash flows and observed pricesfor other OTC transactions 

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsSeptember 30,2005

bearing similar risk characteristics. The fairvalue of these instruments appears on the consolidated statement offinancial condition as unrealized gains or losses on credit swaps. TheCompany does not believe that its credit swaps fall outside the scopeof the guidance of SFAS No. 133 paragraph 10d, as amended by SFAS No.149, Amendment of Statement 133 on Derivative Instruments andHedging Activities, because there is no contractual requirementthat the protection purchaser be exposed to the underlying risk.

Net credit swap revenue includes realized and unrealized gains andlosses on credit swaps and net premiums earned.

Premiums aretaken into income as they are earned over a specified time period.Accrued premiums on credit swaps represent premiums earned but not yetpayable by Primus Financial's counterparty. Premiums receivableon credit swaps represents premiums that are both earned by and payableto Primus Financial.

Financial Guarantee-InsuranceContracts

The Company has undertaken a limited amount offinancial guarantee business through its subsidiary, Primus  Re.Financial guarantees are insurance contracts that contingently requirethe guarantor to make payments to the guaranteed party. The Companydesigns its guarantee contracts to qualify as non-derivatives inaccordance with the scope exception under paragraph 10d of SFAS 133 asamended by SFAS No. 149. This scope exception requires that theguaranteed party be exposed to loss both at inception and over the lifeof the contract, incurrence of loss must be a precondition for paymentunder the contract, and these losses are based on payments to be madesolely to reimburse the guaranteed party for failure of the debtor tosatisfy its required payment obligations under a nonderivativecontract, either at pre-specified payment dates or accelerated paymentdates as a result of the occurrence of an event of default (as definedin the financial obligation covered by the guarantee contract) ornotice of acceleration being made to the debtor by the creditor. Thus,the Company accounts for its financial guarantee contracts inaccordance with SFAS No. 60, Accounting and Reporting by InsuranceEnterprises. This requires that premiums are deferred andrecognized over the life of the contract and that losses are recordedin the period that they occur based on an estimate of the ultimate costof losses incurred.

The Company does not actively offerfinancial guarantee insurance. Rather, it is an alternative the Companyhas available when a counterparty requests an insurance contractinstead of a credit swap. Generally, a counterparty's choice of afinancial guarantee insurance contract versus a credit swap isdetermined by economic terms available in the marketplace as well asregulatory and accounting considerations. Also, the purchaser of aninsurance contract cannot submit a claim for payment unless it has aninsurable loss, whereas the purchaser of a credit swap need not haveactual exposure to the underlying risk.

Insurance PremiumsEarned and Receivable and Related Expenses

In exchange forproviding financial guarantee protection to counterparties, Primus Rereceives premiums over the life of the contract. The amount expectedover the life of the policy is reflected in the statement of financialcondition and will be reduced as payments are received quarterly inadvance.

Although Primus Re provides insurance and purchasesoff-setting credit swaps through "separateaccounts" under a private act, those accounts of Primus Reare not deemed to be separate accounts under SOP 03-01, Accounting& Reporting by Insurance Enterprises for Certain NontraditionalLong-Duration Contracts for Separate Accounts, since investmentperformance is not passed through to the contract holder.

7

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsSeptember 30,2005

Policy acquisition costs include only thoseexpenses that relate primarily to, and vary with, premium production.Such costs generally include compensation of employees involved inunderwriting and policy issuance functions, certain rating agency fees,state premium taxes and certain other underwriting expenses. No costshave been deferred by the Company as of September  30, 2005, asany such amounts have been immaterial.

Deferred FinancialGuarantee Premiums

Unearned premiums related to the financialguarantee protection provided are used to establish the liability atinception. This liability is reflected in income on a straight-linebasis over the period the risk protection is provided.

UnpaidLosses and Loss Expenses on Financial Guarantees

Liabilitiesfor unpaid losses and loss expenses include the accumulation ofindividual case estimates for claims reported as well as estimates ofincurred but not reported claims and estimates of loss settlementexpenses on the obligations it has insured. Estimates will be basedupon historical industry loss experience modified for current trends aswell as prevailing economic, legal and social conditions. Any changesin estimates are reflected in operating results in the period in whichthe estimates changed. At September  30, 2005 and at December 31,2004, the Company had no loss reserves recorded.

IncomeTaxes

Income tax expense is computed in accordance with therequirements of SFAS No. 109, Accounting for Income Taxes, whichprescribes the asset and liability approach to accounting for incometaxes. The asset and liability approach requires the recognition ofdeferred tax liabilities and assets for the expected future taxconsequences of temporary differences between the carrying amounts andthe tax bases of assets and liabilities.

Employee CompensationPlans

In 2003, the Company adopted the fair value approach on aprospective basis for recording stock-based employee compensation inaccordance with the fair value method prescribed by SFAS No. 123,Accounting for Stock-based Compensation, as amended by SFAS No.148, Accounting for Stock Based Compensation—Transition andDisclosure. Compensation expense is recognized based on the fairvalue of stock options, performance shares, restricted shares andrestricted share units ("RSU") granted overthe related vesting period. The fair value of the stock options grantedis determined through the use of a market accepted option-pricingmodel.

Recently Issued Accounting Standards

In May2005, the Financial Accounting Standards Board("FASB") issued SFAS 154, AccountingChanges and Error Corrections – a replacement of APB Opinion No.20 and FASB Statement No. 3. This statement requires retrospectiveapplication to prior periods' financial statements of changes inaccounting principle. SFAS 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15,2005. The adoption of SFAS 154 is not expected to have a significantimpact on the Company's financial statements.

In December2004, the FASB issued SFAS No.  123  (R), Share-BasedPayment. SFAS  No.  123  (R) is a revision of SFASNo.  123 and supersedes Accounting Principles Board("APB") Opinion No.  25, Accountingfor Stock Issued to Employees, and amends SFAS No.  95Statement of Cash Flows. SFAS No.  123  (R)eliminates the ability to account for share-based compensationtransactions using APB 

8

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsSeptember 30,2005

Opinion No.  25 and requires allshare-based payments to employees, including grants of employee stockoptions, to be recognized in the financial statements using a fairvalue-based method. In April 2005, the Securities and ExchangeCommission ("SEC") amended the effective dateof SFAS No.  123  (R) to provide additional time forcompanies to comply with the reporting requirements. The Company willadopt SFAS No. 123 (R) on January 1, 2006, and does not expect amaterial impact on the consolidated financial statements.

InMarch 2005, the SEC staff issued Staff Accounting Bulletin No.107 ("SAB No.  107") to provideguidance on SFAS No.  123  (R). SAB No.  107 providesthe staff's view regarding the valuation of share-based paymentarrangements for public companies. In particular, this SAB providesguidance related to share-based payment transactions withnon-employees, the transition from non public to public entity status,valuation methods (including assumptions such as expected volatilityand expected term), the accounting for certain redeemable financialinstruments issued under share-based payment arrangements, theclassification of compensation expense, non-GAAP financial measures,first time adoption of SFAS No.  123  (R), the modificationof employee share options prior to the adoption of SFAS No.123  (R) and disclosure in Management's Discussion andAnalysis subsequent to adoption of SFAS No.  123  (R). SABNo.  107 was effective March  29, 2005. The Company doesnot expect the adoption of this guidance to have a material impact onthe consolidated financial statements.

3.    Cash and CashEquivalents

The Company and its subsidiaries invest only inobligations of the United States of America or direct debt obligationsof U.S. Agencies (including government-sponsored enterprises) rated AAAand Aaa by the respective Rating Agencies, commercial paper rated A-1and P-1 by the respective Rating Agencies and money market funds.

All outstanding obligations in this category mature within 90days.

4.    Available-for-Sale Investments

Available-for-sale investments included obligations of the UnitedStates of America or direct debt obligations of U.S. Agencies(including government-sponsored enterprises) rated AAA and Aaa by therespective Rating Agencies. Available-for-sale investments haveoriginal maturities or maturities at time of purchase greater than 90days. At September  30, 2005, no investment has an originalmaturity or maturity at time of purchase of greater than 3 years.

Available-for-sale investments are reported in the balance sheet attheir fair value. Changes in fair value are reported in othercomprehensive income/(loss) in shareholders' equity, net oftaxes.

5.     Credit Swap Revenues and Portfolio

Netcredit swap revenue, as presented in the consolidated statement ofoperations, is comprised of changes in the fair value of credit swaps,realized gains or losses on the termination of credit swaps and premiumincome or expense. The realized gains and losses on credit swapsrepresent realized gains and losses on terminated or assigned creditswaps. The realization of gains or losses on credit swaps willgenerally result in a reduction in unrealized gains or losses andaccrued premium at the point in time realization occurs.

Inexchange for providing credit protection to its counterparties, PrimusFinancial receives premium payments as a series of fixed cash flows.Premiums are taken into income as they are earned over a specified timeperiod. Accrued premiums on credit swaps represent premiums earned butnot yet payable by Primus Financial's counterparty. Premiumsreceivable on credit swaps represents premiums that are both earned byand payable to Primus Financial. When Primus Financial purchases creditprotection from its counterparties, Primus Financial pays premiums as aseries of fixed cash flows. The premium expense is recognized ratablyover the life of the transaction as a component of net credit swaprevenue.

9

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsSeptember 30,2005

In accordance with accounting principlesgenerally accepted in the United States, the Company carries its creditswaps on its balance sheet at their fair value. Changes in the fairvalue of the Company's credit swap portfolio are recorded asunrealized gains or losses in the Company's consolidatedstatement of operations. If a credit swap has an increase in fair valueduring a period, the increase will add to the Company's netcredit swap revenues for that period. Conversely, if a credit swap hasa decline in fair value during the period, the decline will subtractfrom the Company's net credit swap revenues for that period.Changes in the fair value of the Company's credit swap portfolioare a function of the notional amount and composition of the portfolioand prevailing market credit swap premiums for comparable credit swaps.The Company generally holds the credit swaps it sells to maturity, atwhich point, assuming no credit event has occurred, the cumulativeunrealized gains and losses on each credit swap would equal zero. Ingeneral, the Company aggregates fair values of individual credit swapsby counterparty for presentation on the Company's statement ofcondition. If the aggregate total of fair values for a counterparty isa net gain, the total is recorded as a component of unrealized gains oncredit swaps, at fair value in the statement of financial condition. Ifthe aggregate total of fair values for a counterparty is a net loss,the total is recorded as a component of unrealized losses on creditswaps, at fair value in the statement of financial condition.Aggregation by counterparty is applied where a valid InternationalSwaps and Derivatives Association ("ISDA")master agreement is in place with the counterparty. In instances wherethe Company does not yet have a valid ISDA master agreement with thecounterparty, the fair values of individual swap transactions arerecorded as components of unrealized gains or losses on credit swaps,at fair value, dependent upon whether the individual contract was in again or a loss position.

As a general rule, when the Companysells credit protection, it intends to hold the transaction untilmaturity. However, there are two sets of circumstances in which theCompany could elect to terminate transactions prior to maturity, andthe Company monitors its portfolio on a continuing basis to assesswhether those circumstances are present.

First, whenever theCompany receives new information suggesting that the credit quality ofthe underlying risk has deteriorated to a material degree, the Companyconsiders the possibility of terminating the transaction, usually at aloss, to avoid the larger loss that could result if the credit swapwere to remain in place until a credit event occurs. The principalfactor that governs the Company's decision regarding terminationin these circumstances is whether the Company believes that theunderlying risk has become substantially greater than the level of riskthe Company would choose to assume in entering into a new sale ofcredit default protection.

Second, the Company may also elect toterminate a transaction for which it has an unrealized gain based onone or more of the following considerations: the likelihood of furthergains arising from the position, its view as to whether the capitaldedicated to the position would be profitably reallocated, its totalexposure to a particular Reference Entity, the total size of itsportfolio in relation to its capital and the total size of its swappositions and exposures with a particular counterparty which might bereduced so that the counterparty may enter into additional swaps withthe Company.

The Company terminates (or offsets) a credit swapin any one of three ways. The Company may negotiate an agreedtermination through the original counterparty (an unwind). The Companymay negotiate an assignment and novation of its rights and obligationsunder the credit swap to a third party (an assignment). As analternative to terminating a transaction, the Company may enter into anequal and opposite transaction with a third party under which theCompany purchases credit default protection on terms that match theterms of the original transaction (an offset). In this last case, bothsides of the position may subsequently be unwound or assigned.

In the event of an unwind or assignment, the Company pays orreceives a cash settlement negotiated with the counterparty orassignee, based on the fair value of the credit swap contract and theaccrued premium on the swap contract at the time of negotiation. Theamounts the Company pays 

10

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsSeptember 30,2005

or receives are recorded as a realization offair value and as a realization of accrued premiums in the period inwhich the termination occurs.

The Company distinguishes amongcredit swaps sold – single name, credit swaps sold –tranche, credit swaps purchased as short-term investments and creditswaps purchased to offset the credit risk on credit swaps previouslysold. Credit swaps sold – single name refers to credit swapprotection relating to a single reference entity. Credit swaps sold– tranche refers to credit swap protection referencing portfolioscontaining obligations of multiple reference entities, which we beganselling during the second quarter of 2005. We have only purchasedcredit swap protection against single name reference entities. Thetables below present the components of credit swap revenues for thethree and nine months ended September 30, 2005 and 2004, inthousands.

Net credit swap revenues/ (losses) for the threemonths ended September 30, 2005

|                                                                  |  |                         |        |               |  |                  |         |                                   |  |        |         |         |  |        |        |         |  |        |        |         |  |  |
|------------------------------------------------------------------|--|-------------------------|--------|---------------|--|------------------|---------|-----------------------------------|--|--------|---------|---------|--|--------|--------|---------|--|--------|--------|---------|--|--|
|                                                             |  | Premiumincome/(expense) |        | Realizedgains |  | Realized(losses) |         | Changein unrealizedgains/(losses) |  | Total  |
| Credit swaps sold – singlename                             |  | $                       | 14,177 |          |  | $                | 201     |                              |  | $      | (1,264  | )  |  | $      | 15,214 |    |  | $      | 28,328 |    |
| Creditswaps sold –tranche                                  |  |                    | 114    |          |  |             | — |                              |  |   | — |    |  |   | (167   | )  |  |   | (53    | )  |
| Creditswaps purchased as short-terminvestments                   |  |                    | (308   | )        |  |             | 15      |                              |  |   | (26     | )  |  |   | (455   | )  |  |   | (774   | )  |
| Creditswaps purchased to offset credit risk on certain swapssold |  |                    | (21    | )        |  |             | — |                              |  |   | (174    | )  |  |   | 143    |    |  |   | (52    | )  |
| Total                                                            |  | $                       | 13,962 |          |  | $                | 216     |                              |  | $      | (1,464  | )  |  | $      | 14,735 |    |  | $      | 27,449 |    |
|                                                                  |

Netcredit swap revenues/ (losses) for the nine months ended September 30,2005

|                                                                  |  |                         |        |               |  |                  |         |                                   |  |        |         |         |  |        |         |         |  |        |        |         |  |  |
|------------------------------------------------------------------|--|-------------------------|--------|---------------|--|------------------|---------|-----------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|--------|---------|--|--|
|                                                             |  | Premiumincome/(expense) |        | Realizedgains |  | Realized(losses) |         | Changein unrealizedgains/(losses) |  | Total  |
| Credit swaps sold – singlename                             |  | $                       | 38,458 |          |  | $                | 790     |                              |  | $      | (4,283  | )  |  | $      | (19,514 | )  |  | $      | 15,451 |    |
| Creditswaps sold –tranche                                  |  |                    | 210    |          |  |             | — |                              |  |   | — |    |  |   | 300     |    |  |   | 510    |    |
| Creditswaps purchased as short-terminvestments                   |  |                    | (1,040 | )        |  |             | 671     |                              |  |   | (56     | )  |  |   | 171     |    |  |   | (254   | )  |
| Creditswaps purchased to offset credit risk on certain swapssold |  |                    | (67    | )        |  |             | — |                              |  |   | (174    | )  |  |   | 206     |    |  |   | (35    | )  |
| Total                                                            |  | $                       | 37,561 |          |  | $                | 1,461   |                              |  | $      | (4,513  | )  |  | $      | (18,837 | )  |  | $      | 15,672 |    |
|                                                                  |

Netcredit swap revenues/ (losses) for the three months ended September 30,2004

|                                                                  |  |                         |        |               |  |                  |         |                                   |  |        |         |         |  |        |        |         |  |        |        |         |  |  |
|------------------------------------------------------------------|--|-------------------------|--------|---------------|--|------------------|---------|-----------------------------------|--|--------|---------|---------|--|--------|--------|---------|--|--------|--------|---------|--|--|
|                                                             |  | Premiumincome/(expense) |        | Realizedgains |  | Realized(losses) |         | Changein unrealizedgains/(losses) |  | Total  |
| Credit swaps sold – singlename                             |  | $                       | 11,192 |          |  | $                | 3,251   |                              |  | $      | (778    | )  |  | $      | 10,998 |    |  | $      | 24,663 |    |
| Creditswaps purchased as short-terminvestments                   |  |                    | (279   | )        |  |             | 346     |                              |  |   | (34     | )  |  |   | (1,335 | )  |  |   | (1,302 | )  |
| Creditswaps purchased to offset credit risk on certain swapssold |  |                    | (23    | )        |  |             | — |                              |  |   | — |    |  |   | (7     | )  |  |   | (30    | )  |
| Total                                                            |  | $                       | 10,890 |          |  | $                | 3,597   |                              |  | $      | (812    | )  |  | $      | 9,656  |    |  | $      | 23,331 |    |
|                                                                  |

11

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsSeptember 30,2005

Net credit swap revenues/ (losses) forthe nine months ended September 30, 2004

|                                                                  |  |                         |        |               |  |                  |         |                                   |  |        |         |         |  |        |         |         |  |        |        |         |  |  |
|------------------------------------------------------------------|--|-------------------------|--------|---------------|--|------------------|---------|-----------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|--------|---------|--|--|
|                                                             |  | Premiumincome/(expense) |        | Realizedgains |  | Realized(losses) |         | Changein unrealizedgains/(losses) |  | Total  |
| Credit swaps sold – singlename                             |  | $                       | 31,600 |          |  | $                | 5,360   |                              |  | $      | (791    | )  |  | $      | (9,254  | )  |  | $      | 26,915 |    |
| Creditswaps purchased as short-terminvestments                   |  |                    | (527   | )        |  |             | 1,086   |                              |  |   | (81     | )  |  |   | (1,198  | )  |  |   | (720   | )  |
| Creditswaps purchased to offset credit risk on certain swapssold |  |                    | (69    | )        |  |             | — |                              |  |   | — |    |  |   | 40      |    |  |   | (29    | )  |
| Total                                                            |  | $                       | 31,004 |          |  | $                | 6,446   |                              |  | $      | (872    | )  |  | $      | (10,412 | )  |  | $      | 26,166 |    |
|                                                                  |

Thenotional amount, fair value and average fair value of open credit swaptransactions entered into with third parties at September 30, 2005 andDecember 31, 2004 are as follows (in thousands and US dollarequivalent):

|                                      |  |                  |            |                 |  |        |            |        |  |  |
|--------------------------------------|--|------------------|------------|-----------------|--|--------|------------|--------|--|--|
|                                 |  | September30,2005 |            | December31,2004 |
| **Gross NotionalAmounts:**           |  |             |       |            |  |   |       |   |
| Credit swaps sold – singlename |  | $                | 13,028,562 |            |  | $      | 10,544,728 |   |
| Creditswaps sold –tranche      |  |             | 50,000     |            |  |   | —    |   |
| Credit swapspurchased                |  |             | 358,364    |            |  |   | 468,175    |   |
| **Fairvalue:**                       |  |             |       |            |  |   |       |   |
| Asset                                |  |             | 29,157     |            |  |   | 46,517     |   |
| Liability                            |  |             | 1,737      |            |  |   | 259        |   |
| **Averagefairvalue:**                |  |             |       |            |  |   |       |   |
| Asset                                |  |             | 29,483     |            |  |   | 33,778     |   |
| Liability                            |  |             | 3,475      |            |  |   | 392        |   |
|                                      |

"Asset"in the above table represents unrealized gains on credit swaps while"Liability" represents unrealized losses oncredit swaps. All credit swaps that have been contractually establishedwith each counterparty under an ISDA master agreement are subject tonetting arrangements. The notional amounts of the credit swap contractsin the preceding table are presented on a gross basis and the fairvalues of such contracts are presented net by counterparty, where amaster agreement is in place. "Average fairvalue" in the table above represents the averages over thenine months ended September 30, 2005 and the year ended December 31,2004.

Under the terms of Primus Financial's operatingguidelines, derivatives transactions can only include credit swaps.Credit swaps are derivative transactions that obligate one party to thetransaction (the "Seller") to pay an amountto the other party to the transaction (the"Buyer") should one of a specified group ofevents ("Credit Events") be incurred by anunrelated third party (the "ReferenceEntity") specified in the contract. The amount to be paidby the Seller will either be (a) the notional amount of thetransaction, in exchange for which the Seller must be delivered adefined obligation of the Reference Entity (called physicalsettlement), or (b) the difference between the current market value ofa defined obligation of the Reference Entity and the notional amount ofthe transaction (called cash settlement). In exchange for incurring thepotential of a Credit Event-generated loss, the Seller will receive afixed premium for the term of the contract (or until the occurrence ofa Credit Event). The fixed premium is generally paid quarterly inarrears over the term of the transaction.

Nearly alltransactions entered into between the Buyer and the Seller are subjectto an ISDA master agreement executed by both parties. The masteragreement allows for the consolidation of the 

12

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsSeptember 30,2005

market exposures and termination of alltransactions between the Buyer and Seller in the event a Default (asdefined by the master agreement) is incurred by either party.

Primus Financial is primarily a Seller of credit swaps, although itmay also buy credit swaps. Credit swaps purchased to off-set risks donot qualify as hedges in accordance with SFAS No. 133. In addition,Primus Financial is permitted to purchase credit swaps in order to seekshort-term market appreciation as a limited percentage of its overallportfolio (represented as Credit Swaps Purchased in the below tables).The company's operating guidelines and board authorization limitsthe notional amount of credit swaps purchased for this purpose to sevenand a half percent of the notional amount of credit swaps sold.

The primary risks inherent in the Company's activities are (a)that Reference Entities specified in its credit swap transactions willincur Credit Events (Credit Events may include any or all of thefollowing: bankruptcy, failure to pay, repudiation or moratorium, andmodified or original restructuring) that will require Primus Financialto make payments to the Buyers of the transactions, (b) where PrimusFinancial is a Buyer of a credit swap and a Credit Event occurs, theSeller fails to make payment to the Company, and (c) that Buyers of thetransactions from Primus Financial will default on their requiredpremium payments at times when the fair value of the underlyingtransactions are positive to Primus Financial. Since inception, none ofthese events have occurred.

The tables below summarize thenotional amounts and fair value at risk to performance by ReferenceEntities and Counterparties of credit swap transactions, which arerecorded at fair value (summarized by credit rating) as of September30, 2005 and December 31, 2004. Fair Value is the fair value of alltransactions after consideration of offsetting exposures under MasterAgreements with counterparties.

Risk off-set transactions areincluded in the table above and tables below as part of Credit SwapsPurchased. The total notional amounts of risk off-set transactions werezero and $5.0 million at September 30, 2005 and December  31,2004, respectively. Fair value of the risk offset transactions equaledzero and $(206) thousand at September 30, 2005 and December 31, 2004,respectively.

13

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsSeptember 30,2005

(in thousands and U.S. dollarequivalent)

|                                      |  |                  |            |                 |  |                |        |           |  |        |            |        |  |        |         |         |  |  |
|--------------------------------------|--|------------------|------------|-----------------|--|----------------|--------|-----------|--|--------|------------|--------|--|--------|---------|---------|--|--|
|                                 |  | September30,2005 |            | December31,2004 |
| Moody'sRatingCategory                |  | NotionalAmount   |            | FairValue       |  | NotionalAmount |        | FairValue |
| **ReferenceEntity**                  |  |             |       |            |  |           |   |      |  |   |       |   |  |   |    |    |
| Credit Swaps Sold –SingleName: |  |             |       |            |  |           |   |      |  |   |       |   |  |   |    |    |
|     Aaa          |  | $                | 580,130    |            |  | $              | 966    |      |  | $      | 651,270    |   |  | $      | 866     |    |
|     Aa           |  |             | 2,353,109  |            |  |           | 6,281  |      |  |   | 1,917,131  |   |  |   | 5,609   |    |
|     A            |  |             | 5,270,203  |            |  |           | 17,561 |      |  |   | 4,310,452  |   |  |   | 22,511  |    |
|     Baa          |  |             | 4,682,055  |            |  |           | 9,103  |      |  |   | 3,642,330  |   |  |   | 19,295  |    |
|     Ba           |  |             | 110,065    |            |  |           | (3,173 | )    |  |   | 23,545     |   |  |   | 179     |    |
|     B            |  |             | 33,000     |            |  |           | (1,586 | )    |  |   | —    |   |  |   | — |    |
| Total                                |  | $                | 13,028,562 |            |  | $              | 29,152 |      |  | $      | 10,544,728 |   |  | $      | 48,460  |    |
| CreditSwaps Sold –Tranche:     |  |             |       |            |  |           |   |      |  |   |       |   |  |   |    |    |
|     Aa           |  | $                | 50,000     |            |  | $              | 300    |      |  | $      | —    |   |  | $      | — |    |
| Total                                |  | $                | 50,000     |            |  | $              | 300    |      |  | $      | —    |   |  | $      | — |    |
| CreditSwapsPurchased:                |  |             |       |            |  |           |   |      |  |   |       |   |  |   |    |    |
| Aaa                                  |  | $                | 44,052     |            |  | $              | (231   | )    |  | $      | 47,090     |   |  | $      | (158    | )  |
| Aa                                   |  |             | 12,026     |            |  |           | (29    | )    |  |   | 13,545     |   |  |   | (44     | )  |
| A                                    |  |             | 185,195    |            |  |           | (802   | )    |  |   | 209,815    |   |  |   | (803    | )  |
| Baa                                  |  |             | 81,013     |            |  |           | (671   | )    |  |   | 160,635    |   |  |   | (969    | )  |
| NR                                   |  |             | 36,078     |            |  |           | (298   | )    |  |   | 37,090     |   |  |   | (228    | )  |
| Total                                |  | $                | 358,364    |            |  | $              | (2,031 | )    |  | $      | 468,175    |   |  | $      | (2,202  | )  |
| **CounterpartyBuyer**                |  |             |       |            |  |           |   |      |  |   |       |   |  |   |    |    |
| Credit SwapsSold – SingleName: |  |             |       |            |  |           |   |      |  |   |       |   |  |   |    |    |
| Aaa                                  |  | $                | 5,000      |            |  | $              | 42     |      |  | $      | 5,000      |   |  | $      | 49      |    |
| Aa                                   |  |             | 10,995,674 |            |  |           | 22,110 |      |  |   | 8,304,867  |   |  |   | 35,922  |    |
| A                                    |  |             | 2,027,888  |            |  |           | 7,000  |      |  |   | 2,234,861  |   |  |   | 12,489  |    |
| Total                                |  | $                | 13,028,562 |            |  | $              | 29,152 |      |  | $      | 10,544,728 |   |  | $      | 48,460  |    |
| CreditSwaps Sold –Tranche:     |  |             |       |            |  |           |   |      |  |   |       |   |  |   |    |    |
| Aa                                   |  | $                | 50,000     |            |  | $              | 300    |      |  | $      | —    |   |  | $      | — |    |
| Total                                |  | $                | 50,000     |            |  | $              | 300    |      |  | $      | —    |   |  | $      | — |    |
| **CounterpartySeller**               |  |             |       |            |  |           |   |      |  |   |       |   |  |   |    |    |
| Credit SwapsPurchased:               |  |             |       |            |  |           |   |      |  |   |       |   |  |   |    |    |
| Aa                                   |  | $                | 280,325    |            |  | $              | (1,553 | )    |  | $      | 387,858    |   |  | $      | (1,699  | )  |
| A                                    |  |             | 78,039     |            |  |           | (478   | )    |  |   | 80,317     |   |  |   | (503    | )  |
| Total                                |  | $                | 358,364    |            |  | $              | (2,031 | )    |  | $      | 468,175    |   |  | $      | (2,202  | )  |
|                                      |

14

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsSeptember 30,2005

|                                      |  |                   |            |                  |  |                |        |           |  |        |            |        |  |        |         |         |  |  |
|--------------------------------------|--|-------------------|------------|------------------|--|----------------|--------|-----------|--|--------|------------|--------|--|--------|---------|---------|--|--|
|                                 |  | September30, 2005 |            | December 31,2004 |
| S&P RatingCategory               |  | NotionalAmount    |            | FairValue        |  | NotionalAmount |        | FairValue |
| **ReferenceEntity**                  |  |              |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
| Credit Swaps Sold −SingleName: |  |              |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
|     AAA          |  | $                 | 630,130    |             |  | $              | 963    |      |  | $      | 627,725    |   |  | $      | 822     |    |
|     AA           |  |              | 1,963,109  |             |  |           | 4,747  |      |  |   | 1,826,628  |   |  |   | 4,462   |    |
|     A            |  |              | 6,029,816  |             |  |           | 21,103 |      |  |   | 4,863,204  |   |  |   | 25,569  |    |
|     BBB          |  |              | 4,265,494  |             |  |           | 8,529  |      |  |   | 3,217,171  |   |  |   | 17,536  |    |
|     BB           |  |              | 125,013    |             |  |           | (4,712 | )    |  |   | 10,000     |   |  |   | 71      |    |
|     B            |  |              | 15,000     |             |  |           | (1,478 | )    |  |   | —    |   |  |   | — |    |
| Total                                |  | $                 | 13,028,562 |             |  | $              | 29,152 |      |  | $      | 10,544,728 |   |  | $      | 48,460  |    |
| CreditSwaps Sold −Tranche:     |  |              |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
|     AA           |  | $                 | 50,000     |             |  | $              | 300    |      |  | $      | —    |   |  | $      | — |    |
| Total                                |  | $                 | 50,000     |             |  | $              | 300    |      |  | $      | —    |   |  | $      | — |    |
| CreditSwapsPurchased:                |  |              |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
|     AAA          |  | $                 | 20,000     |             |  | $              | (67    | )    |  | $      | 57,090     |   |  | $      | (198    | )  |
|     AA           |  |              | 24,052     |             |  |           | (68    | )    |  |   | 27,090     |   |  |   | (109    | )  |
|     A            |  |              | 229,247    |             |  |           | (1,164 | )    |  |   | 216,270    |   |  |   | (940    | )  |
|     BBB          |  |              | 73,039     |             |  |           | (594   | )    |  |   | 167,725    |   |  |   | (955    | )  |
|     NR           |  |              | 12,026     |             |  |           | (138   | )    |  |   | —    |   |  |   | — |    |
| Total                                |  | $                 | 358,364    |             |  | $              | (2,031 | )    |  | $      | 468,175    |   |  | $      | (2,202  | )  |
| **CounterpartyBuyer**                |  |              |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
| Credit Swaps Sold −SingleName: |  |              |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
|     AAA          |  | $                 | 35,065     |             |  | $              | (118   | )    |  | $      | 5,000      |   |  | $      | 49      |    |
|     AA           |  |              | 8,959,205  |             |  |           | 16,599 |      |  |   | 6,643,559  |   |  |   | 27,941  |    |
|     A            |  |              | 4,034,292  |             |  |           | 12,671 |      |  |   | 3,896,169  |   |  |   | 20,470  |    |
| Total                                |  | $                 | 13,028,562 |             |  | $              | 29,152 |      |  | $      | 10,544,728 |   |  | $      | 48,460  |    |
| CreditSwaps Sold −Tranche:     |  |              |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
|     AA           |  | $                 | 50,000     |             |  | $              | 300    |      |  | $      | —    |   |  | $      | — |    |
| Total                                |  | $                 | 50,000     |             |  | $              | 300    |      |  | $      | —    |   |  | $      | — |    |
| **CounterpartySeller**               |  |              |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
| Credit SwapsPurchased:               |  |              |       |             |  |           |   |      |  |   |       |   |  |   |    |    |
|     AA           |  | $                 | 236,273    |             |  | $              | (1,417 | )    |  | $      | 290,768    |   |  | $      | (1,433  | )  |
|     A            |  |              | 122,091    |             |  |           | (614   | )    |  |   | 177,407    |   |  |   | (769    | )  |
| Total                                |  | $                 | 358,364    |             |  | $              | (2,031 | )    |  | $      | 468,175    |   |  | $      | (2,202  | )  |
|                                      |

PrimusFinancial's operating guidelines impose various limits on thegeographical concentration of its business based on the country ofdomicile of each Reference Entity. Additionally, PrimusFinancial's counterparties are global financial institutions, andnearly all have entered into Master Agreements with Primus Financialthat consolidate the counterparty risk to one office of thatcounterparty. For the nine months ended September 30, 2005, threecounterparties each generated 

15

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsSeptember 30,2005

greater than ten percent of theCompany's total premium revenue, and for the nine months endedSeptember 30, 2004, three counterparties each generated greater thanten percent of the Company's total premium revenue.

Thetable below shows the geographical distribution of PrimusGuaranty's credit swap portfolio by domicile of the ReferenceEntity and domicile of the counterparty (in thousands and U.S. dollarequivalent):

|                                          |  |                  |            |                 |  |                |        |           |  |        |            |        |  |        |         |         |  |  |
|------------------------------------------|--|------------------|------------|-----------------|--|----------------|--------|-----------|--|--------|------------|--------|--|--------|---------|---------|--|--|
|                                     |  | September30,2005 |            | December31,2004 |
| Country ofDomicile                       |  | NotionalAmount   |            | FairValue       |  | NotionalAmount |        | FairValue |
| **Credit Swaps Sold – SingleName** |  |             |       |            |  |           |   |      |  |   |       |   |  |   |    |    |
| By ReferenceEntity:                      |  |             |       |            |  |           |   |      |  |   |       |   |  |   |    |    |
|     NorthAmerica     |  | $                | 7,828,565  |            |  | $              | 12,779 |      |  | $      | 5,798,363  |   |  | $      | 28,926  |    |
|     Europe           |  |             | 4,645,997  |            |  |           | 15,436 |      |  |   | 4,367,365  |   |  |   | 17,733  |    |
|     Pacific          |  |             | 425,000    |            |  |           | 976    |      |  |   | 305,000    |   |  |   | 1,421   |    |
|     Others           |  |             | 129,000    |            |  |           | (39    | )    |  |   | 74,000     |   |  |   | 380     |    |
| Total                                    |  | $                | 13,028,562 |            |  | $              | 29,152 |      |  | $      | 10,544,728 |   |  | $      | 48,460  |    |
| ByCounterparty:                          |  |             |       |            |  |           |   |      |  |   |       |   |  |   |    |    |
|     NorthAmerica     |  | $                | 7,105,047  |            |  | $              | 12,389 |      |  | $      | 5,596,849  |   |  | $      | 23,146  |    |
|     Europe           |  |             | 5,826,515  |            |  |           | 16,690 |      |  |   | 4,885,879  |   |  |   | 25,110  |    |
|     Pacific          |  |             | 50,000     |            |  |           | (32    | )    |  |   | —    |   |  |   | — |    |
|     Others           |  |             | 47,000     |            |  |           | 105    |      |  |   | 62,000     |   |  |   | 204     |    |
| Total                                    |  | $                | 13,028,562 |            |  | $              | 29,152 |      |  | $      | 10,544,728 |   |  | $      | 48,460  |    |
| **CreditSwaps Sold – Tranche**     |  |             |       |            |  |           |   |      |  |   |       |   |  |   |    |    |
| ByCounterparty:                          |  |             |       |            |  |           |   |      |  |   |       |   |  |   |    |    |
|     U.S.             |  | $                | 50,000     |            |  | $              | 300    |      |  | $      | —    |   |  | $      | — |    |
| Total                                    |  | $                | 50,000     |            |  | $              | 300    |      |  | $      | —    |   |  | $      | — |    |
| **CreditSwaps Purchased**                |  |             |       |            |  |           |   |      |  |   |       |   |  |   |    |    |
| By ReferenceEntity:                      |  |             |       |            |  |           |   |      |  |   |       |   |  |   |    |    |
|     NorthAmerica     |  | $                | 190,000    |            |  | $              | (1,170 | )    |  | $      | 265,000    |   |  | $      | (1,282  | )  |
|     Europe           |  |             | 168,364    |            |  |           | (861   | )    |  |   | 203,175    |   |  |   | (920    | )  |
| Total                                    |  | $                | 358,364    |            |  | $              | (2,031 | )    |  | $      | 468,175    |   |  | $      | (2,202  | )  |
| ByCounterparty:                          |  |             |       |            |  |           |   |      |  |   |       |   |  |   |    |    |
|     NorthAmerica     |  | $                | 146,078    |            |  | $              | (834   | )    |  | $      | 215,635    |   |  | $      | (935    | )  |
|     Europe           |  |             | 192,286    |            |  |           | (1,046 | )    |  |   | 232,540    |   |  |   | (1,110  | )  |
|     Others           |  |             | 20,000     |            |  |           | (151   | )    |  |   | 20,000     |   |  |   | (157    | )  |
| Total                                    |  | $                | 358,364    |            |  | $              | (2,031 | )    |  | $      | 468,175    |   |  | $      | (2,202  | )  |
|                                          |

Wedo not break out the notional amount and fair value by country of theReference Entities for credit swaps sold – tranche, as weconsider it not meaningful.

16

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsSeptember 30,2005

The table below shows the distribution ofPrimus Guaranty's credit swap portfolio by year of maturity as ofSeptember 30, 2005 and December 31, 2004 (in thousands and U.S. dollarequivalent):

|                                          |  |                   |            |                            |  |                |         |                            |  |        |            |        |  |        |         |         |  |  |
|------------------------------------------|--|-------------------|------------|----------------------------|--|----------------|---------|----------------------------|--|--------|------------|--------|--|--------|---------|---------|--|--|
|                                     |  | September30, 2005 |            | December 31,2004           |
|                                     |  | NotionalAmount    |            | NetFairValueofTransactions |  | NotionalAmount |         | NetFairValueofTransactions |
| **CreditSwaps Sold – Single Name** |  |              |       |                       |  |           |    |                       |  |   |       |   |  |   |    |    |
| Year ofMaturity                          |  |              |       |                       |  |           |    |                       |  |   |       |   |  |   |    |    |
|     2005             |  | $                 | 1,121,661  |                       |  | $              | 279     |                       |  | $      | 2,841,441  |   |  | $      | 3,859   |    |
|     2006             |  |              | 943,693    |                       |  |           | 863     |                       |  |   | 1,014,554  |   |  |   | 1,340   |    |
|     2007             |  |              | 2,496,312  |                       |  |           | 14,885  |                       |  |   | 2,583,503  |   |  |   | 20,442  |    |
|     2008             |  |              | 1,120,586  |                       |  |           | 8,786   |                       |  |   | 1,184,157  |   |  |   | 11,427  |    |
|     2009             |  |              | 2,702,359  |                       |  |           | 6,313   |                       |  |   | 2,901,073  |   |  |   | 11,423  |    |
|     2010             |  |              | 4,643,951  |                       |  |           | (1,974  | )                     |  |   | 20,000     |   |  |   | (31     | )  |
| Total                                    |  | $                 | 13,028,562 |                       |  | $              | 29,152  |                       |  | $      | 10,544,728 |   |  | $      | 48,460  |    |
| **CreditSwaps Sold – Tranche**     |  |              |       |                       |  |           |    |                       |  |   |       |   |  |   |    |    |
| Year ofMaturity                          |  |              |       |                       |  |           |    |                       |  |   |       |   |  |   |    |    |
| 2010                                     |  | $                 | 50,000     |                       |  | $              | 300     |                       |  | $      | —    |   |  | $      | — |    |
| Total                                    |  | $                 | 50,000     |                       |  | $              | 300     |                       |  | $      | —    |   |  | $      | — |    |
| **CreditSwaps Purchased**                |  |              |       |                       |  |           |    |                       |  |   |       |   |  |   |    |    |
| Year ofMaturity                          |  |              |       |                       |  |           |    |                       |  |   |       |   |  |   |    |    |
|     2007             |  | $                 | 10,000     |                       |  | $              | (60     | )                     |  | $      | 10,000     |   |  | $      | (43     | )  |
|     2008             |  |              | —    |                       |  |           | — |                       |  |   | 15,000     |   |  |   | (21     | )  |
|     2009             |  |              | 333,364    |                       |  |           | (1,962  | )                     |  |   | 443,175    |   |  |   | (2,138  | )  |
|     2010             |  |              | 15,000     |                       |  |           | (9      | )                     |  |   | —    |   |  |   | — |    |
| Total                                    |  | $                 | 358,364    |                       |  | $              | (2,031  | )                     |  | $      | 468,175    |   |  | $      | (2,202  | )  |
|                                          |

6.    LongTerm Debt of Subsidiary

Primus Financial issued $75.0 millionof subordinated deferrable interest notes on July 23, 2004 that maturein July 2034. The notes are subordinated in right of payment to theprior payment in full of all existing and future senior indebtedness ofthe company, including counterparty claims. The rate on the notes isset through a monthly auction process, although the Company has theoption to fix the rate for longer periods of time. The notes areredeemable at the option of Primus Financial, in whole or in part, onany auction date, at a redemption price equal to 100% of theprincipal amount of the notes to be redeemed, plus any accrued andunpaid interest thereon to the redemption date. The interest rate onthe notes was fixed on the issue date at a rate of 2.57% (LIBORplus 20 basis points) for a period of one year, expiring in July of2005, at which point the rate was set through a monthly auctionprocess. The Company incurred interest expense (excluding amortizationof debt issuance costs) of $639 thousand and $1.6 million on thesesubordinated notes for the three and nine months ended September 30,2005, respectively.

Costs associated with the issuance of thisdebt were approximately $1.2 million and are shown net of accumulatedamortization in the Company's consolidated statement of financialcondition as debt issuance costs, and amortized over the life of thedebt. Amortization of debt issuance costs is included in interestexpense in the Company's consolidated statement ofoperations.

17

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsSeptember 30,2005

7.    Earnings per Share

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

|                                             |  |                                |         |                               |  |        |        |                             |  |        |         |        |  |        |        |                             |  |  |
|---------------------------------------------|--|--------------------------------|---------|-------------------------------|--|--------|--------|-----------------------------|--|--------|---------|--------|--|--------|--------|-----------------------------|--|--|
|                                        |  | Threemonths endedSeptember 30, |         | Nine months endedSeptember30, |
|                                        |  | 2005                           |         | 2004                          |  | 2005   |        | 2004                        |
| Netearnings available to commonstockholders |  | $                              | 24,009  |                          |  | $      | 18,026 |                        |  | $      | 975     |   |  | $      | 9,938  |                        |
| Weighted-averagebasic sharesoutstanding     |  |                           | 43,120  |                          |  |   | 4,264  |                        |  |   | 43,147  |   |  |   | 3,866  |                        |
| **Effectof dilutive instruments**           |  |                           |    |                          |  |   |   |                        |  |   |    |   |  |   |   |                        |
| Series A PreferredStock                     |  |                           | — |                          |  |   | 29,620 |    (a)  |  |   | — |   |  |   | 29,842 |    (a)  |
| Employeestockoptions                        |  |                           | 88      |                          |  |   | 41     |                        |  |   | 142     |   |  |   | 28     |                        |
| Restrictedshareunits                        |  |                           | 508     |                          |  |   | 339    |                        |  |   | 508     |   |  |   | 390    |                        |
| Warrants                                    |  |                           | 827     |                          |  |   | 955    |                        |  |   | 876     |   |  |   | 956    |                        |
| Dilutivepotentialshares                     |  |                           | 1,423   |                          |  |   | 30,955 |                        |  |   | 1,526   |   |  |   | 31,216 |                        |
| Dilutedshares                               |  |                           | 44,543  |                          |  |   | 35,219 |                        |  |   | 44,673  |   |  |   | 35,082 |                        |
| BasicEPS                                    |  | $                              | 0.56    |                          |  | $      | 4.23   |                        |  | $      | 0.02    |   |  | $      | 2.57   |                        |
| DilutedEPS                                  |  | $                              | 0.54    |                          |  | $      | 0.51   |                        |  | $      | 0.02    |   |  | $      | 0.28   |                        |
|                                             |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                            |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (a) | Forthe three and nine months ended September 30, 2004, Series A PreferredStock which converted to 29,953 thousand shares was included. Theseshares converted to common shares upon the Company's listing onthe NYSE at September 30, 2004. |

8.    Stock BasedCompensation

For the nine months ended September 30, 2005, thecompany retired common shares in an amount equal to approximately $2.4million, representing the amount withheld to pay income taxes on behalfof employees due upon the delivery of common shares to its employees.In addition, for the three and nine months ended September 30, 2005,zero and approximately 40 thousand options were exercised,respectively.

18

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

Thefollowing is a discussion and analysis of our financial condition andresults of operations. This discussion should be read in conjunctionwith our consolidated financial statements and accompanying notes whichappear in the Company's Annual Report on Form 10-K. It containsforward-looking statements that involve risks and uncertainties. Ouractual results could differ materially from those anticipated in theseforward-looking statements as a result of various factors, includingthose discussed below and in the Company's Annual Report on Form10-K, particularly under the headings "RiskFactors" and "Cautionary Note RegardingForward-Looking Statements."

BusinessOverview

We, through our principal operating subsidiary, PrimusFinancial, are primarily engaged in selling credit protection againstinvestment grade credit obligations of corporate and sovereignentities. In exchange for a fixed quarterly premium, if a bankruptcy,failure to pay or restructuring occurs with respect to a ReferenceEntity upon which Primus Financial has sold credit protection, PrimusFinancial agrees to pay the notional amount of the credit swap contractto its Counterparty in exchange for delivery of a credit obligation ofthat Reference Entity. We seek to minimize the risk inherent in ourcredit swap portfolio by maintaining a high quality, highly diversifiedcredit swap portfolio across Reference Entities, industries andcountries.

Primus Financial has the highest counterparty creditratings offered by S&P (AAA) and Moody's (Aaa) and is managedby an experienced team of professionals who have expertise in creditanalysis, investing, risk management and market analysis.

PrimusAsset Management manages the credit swap portfolios of Primus Financialand third parties. For such services, Primus Asset Management receivesa management fee.

Primus Re operates as a financial guaranteeinsurance company, and generates revenue by charging a higher insurancepremium for protection sold than the premium it pays for the offsettingprotection it purchases.

Critical Accounting Policies

Valuation of Credit Swaps

From the inception of ourbusiness, we have applied SFAS, 133, "Accounting forDerivative Instruments and Hedging Activities," whichestablished accounting and reporting standards for derivativeinstruments. SFAS 133 requires recognition of all credit swaps on thebalance sheet at fair value. The market credit swap premium levels usedto determine fair value generally take into account the expectation ofsuch events.

The fair value of the credit swaps depends on anumber of factors, primarily the market level of credit swap premiumsassociated with individual Reference Entities and interest rates.Credit swaps are valued using market-standard pricing models whichcalculate the net present value of differences between future premiumson currently quoted market credit swaps and the contractual futurecredit swap premiums on contracts we have undertaken. Our pricing modelhas been internally developed but is benchmarked against amarket-standard model. Generally, our model uses quoted market creditswap premium data on individual Reference Entities that we purchasefrom an independent pricing service. This service takes pricinginformation from a number of prominent brokers and dealers in thecredit swap market across a range of standard maturities andrestructuring terms, and creates average market credit swap premiumquotes on specific Reference Entities.

We believe there are avariety of factors that may influence market credit swap premiumlevels. The principal factor is the market's view of theprobability that a Reference Entity will default over the multi-yearhorizon typical for a credit swap contract. Those views in turn areinfluenced by the state of the economy, the outlook for corporatefinancial health in general as well as the outlook for 

19

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particular industries and companies.Additional factors include the magnitude of debt outstanding and debtpaying capacity within those same industries and companies. One factorspecific to the credit swap market is the capacity of credit swapmarket participants to sell credit swaps. If, for example, commercialbanks are actively buying protection to manage their regulatorycapital, this will tend, other factors being equal, to absorb thecapacity of protection sellers and cause an increase in market creditswap premiums. Conversely, creation of special purpose vehicles thatsell protection create additional protection seller capacity and,absent additional demand, can cause a decrease in market premiums.Absent rapid and steep changes, interest rates have, at most, a limitedeffect on market credit swap premium levels.

FinancialGuarantees

We have undertaken a limited amount of financialguarantee business through our subsidiary, Primus Re. Financialguarantees are insurance contracts that contingently require theguarantor to make payments to the guaranteed party. Primus Re designsits guarantee contracts to qualify as non-derivatives in accordancewith the scope exception under paragraph 10d of SFAS 133, as amended bySFAS No. 149, Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities. We account for our financial guaranteecontracts in accordance with SFAS No. 60, Accounting and Reportingby Insurance Enterprises. This requires that premiums are deferredand recognized over the life of the contract and that losses arerecorded in the period that they occur based on an estimate of theultimate cost of losses incurred. Policy acquisition costs include onlythose expenses that relate primarily to, and vary with, premiumproduction. No policy acquisition costs have been deferred by us as ofSeptember 30, 2005, as any such amounts have been immaterial. As ofSeptember 30, 2005, only three contracts had been written.

We donot actively offer financial guarantee insurance. Rather, it is analternative we have available when a counterparty requests an insurancecontract instead of a credit swap. Generally, a counterparty'schoice of a financial guarantee insurance contract versus a credit swapis determined by economic terms available in the marketplace as well asregulatory and accounting considerations. Also, the purchaser of aninsurance contract cannot submit a claim for payment unless it has aninsurable loss, whereas the purchaser of a credit swap need not haveactual exposure to the underlying risk.

Stock-BasedEmployee Compensation Plans

In 2003, we adopted the fair valueapproach on a prospective basis for recording stock-based employeecompensation in accordance with the fair value method prescribed inSFAS 123, Accounting for Stock-Based Compensation, as amended bySFAS 148, Accounting for Stock-Based Compensation—Transitionand Disclosure. Under these rules, compensation expense isrecognized based on the fair value of stock options, performanceshares, restricted shares and restricted share units at the time of anaward, adjusted and amortized over the related vesting period. The fairvalue of the stock options granted is determined through the use of amarket-standard option-pricing model, which requires judgment as toappropriate volatility and interest rate factors.

In December2004, the FASB issued SFAS 123R, which replaces SFAS 123 and supersedesAPB 25. SFAS 123R eliminates the choice of alternative accountingmethods, and requires that all entities follow the fair value basedmethod of SFAS 123. Public entities will be required to apply Statement123R as of the first annual reporting period that begins after June 15,2005. The adoption of SFAS 123R is not expected to have a significantimpact on the Company's financial statements.

Results ofOperations

Three months ended September 30, 2005compared with three months ended September 30, 2004

We had netincome of $24.0 million and $18 million for the three months endedSeptember 30, 2005 and 2004, respectively. The net increase for thequarter ended September 30, 2005 was primarily 

20

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driven by the increase in unrealized gainscaused by the appreciation in the value of the credit swap portfolioduring the quarter and an increase in net premiums earned, The resultsfor the quarter ended September 30, 2005 and the quarter endedSeptember 30, 2004, are discussed below.

Net Credit SwapRevenue (Loss)

Net credit swap revenue was $27.4 million and$23.3 million for the three months ended September 30, 2005 and 2004,respectively. Net credit swap revenueincludes:

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

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

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

The table below shows the componentparts of net credit swap revenue for the three months ended September30, 2005 and2004:

|                                           |  |                                |        |         |  |        |        |        |  |  |
|-------------------------------------------|--|--------------------------------|--------|---------|--|--------|--------|--------|--|--|
| ($in thousands)                           |  | Three monthsended September30, |
|                                      |  | 2005                           |        | 2004    |
| Netpremiums earned                        |  | $                              | 13,962 |    |  | $      | 10,890 |   |
| Netrealized gains (losses) on creditswaps |  |                           | (1,248 | )  |  |   | 2,785  |   |
| Net unrealizedgains on creditswaps        |  |                           | 14,735 |    |  |   | 9,656  |   |
| TotalNet Credit SwapRevenue               |  | $                              | 27,449 |    |  | $      | 23,331 |   |
|                                           |

NetPremiums Earned

Net premiums earned were $14.0 million and$10.9 million for the three months ended September 30, 2005 and 2004,respectively. Net premiums earnedinclude:

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

|              |                                             |
|--------------|---------------------------------------------|
| •  | Premium income oncredit swaps sold-tranche; |

|              |                                                                        |
|--------------|------------------------------------------------------------------------|
| •  | Premiumexpense on credit swaps purchased as short-term investments;and |

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

The increase in net premiums earned was primarily driven by theincrease in the size of the credit swaps sold portfolio. The increasewas slightly offset by increased premiums paid for credit swapspurchased for short-term investment purposes in the third quarter of2005. The table below shows the component parts of net premiums earnedfor the three months ended September 30, 2005 and 2004.

|                                                                                    |  |                                |        |         |  |        |         |         |  |  |
|------------------------------------------------------------------------------------|--|--------------------------------|--------|---------|--|--------|---------|---------|--|--|
| ($in thousands)                                                                    |  | Three monthsended September30, |
|                                                                               |  | 2005                           |        | 2004    |
| Premiumincome on credit swaps sold-singlename                                      |  | $                              | 14,177 |    |  | $      | 11,192  |    |
| Premium incomeon credit swapssold-tranche                                          |  |                           | 114    |    |  |   | — |    |
| Premiumexpense on credit swaps purchased as short-terminvestments                  |  |                           | (308   | )  |  |   | (279    | )  |
| Premiumexpense on credit swaps purchased to offset credit risk on certainswapssold |  |                           | (21    | )  |  |   | (23     | )  |
| TotalNet PremiumsEarned                                                            |  | $                              | 13,962 |    |  | $      | 10,890  |    |
|                                                                                    |

Premiumincome on credit swaps sold-single name increased primarily as a resultof the expansion in our credit swaps sold portfolio. The notionalamounts outstanding of credit swaps sold were $13.0 billion and $9.4billion at September 30, 2005 and 2004, respectively.

We beganto sell protection in tranche format during the second quarter of 2005,whereby we sell credit swaps referencing portfolios containingobligations of multiple reference entities. Premium 

21

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income from the tranche sold was $114thousand for the third quarter of 2005, and the total notional amountoutstanding was $50 million at September 30, 2005.

The premiumexpense on credit swaps purchased as short-term investments was $308thousand and $279 thousand for the three months ended September 30,2005 and 2004, respectively. The notional amounts outstanding on creditswaps purchased as short-term investments were $358.4 million and$372.9 million at September 30, 2005 and 2004, respectively.

Thenotional amounts of credit swaps that we had purchased to offset creditrisk on certain credit swaps sold were zero and $5.0 million atSeptember 30, 2005 and 2004, respectively.

Net Realized Gains(Losses) on Credit Swaps

Our business strategy is generally tohold swaps we sell until maturity. However, there are circumstances inwhich we may terminate a credit swap prior to maturity, either as aresult of credit considerations or in order to realize gains. We cannotidentify at the outset of any credit swap transaction whether thecredit swap will be terminated or otherwise disposed of prior to itsmaturity. If the credit swaps we terminate are at attractive marketvalues, we are able to realize gains. Terminating transactions alsoallows us to accelerate premium receipts and provides for additionalgrowth capacity within our credit swap portfolio.

As ofSeptember 30, 2005, there have been no credit events, however, incertain circumstances we will terminate a credit swap at a realizedloss. In general, we terminate credit swaps at a loss where we perceivethat the credit quality of the underlying reference entity risk hasdeteriorated, and we wish to reduce or eliminate our exposure to thereference entity. We may also terminate a credit swap at a loss inorder to create the opportunity to rebalance our portfolio. Weterminated $106.2 million and $536 million notional amount of creditswaps sold for the three months ended September 30, 2005 and 2004,respectively. Net realized gains (losses) from the early termination ofcredit swaps were $(1.2) million and $2.8 million for the three monthsended September 30, 2005 and 2004, respectively. The net realizedlosses incurred during the third quarter of 2005 was primarily theresult of our decision to reduce our exposure to a limited number ofreference entities, which had become the subject of leveraged buy-outsor other events, increasing the credit risk of those referenceentities. We realized losses of $1.3 million and $778 thousand for thethree months ended September 30, 2005, and 2004, respectively, of whichnearly all was caused by the termination of credit swaps to mitigateour credit exposure.

We realized gains of $201 thousand and $3.3million for the three months ended September 30, 2005 and 2004,respectively. The decrease in realized gains is due to smaller gains onterminations that took place in the 2005 period.

Where we havepurchased credit protection as a short-term investment, earlytermination of the credit swaps is a fundamental part of the businessstrategy. We terminated $30 million and $37.2 million notional amountof credit swaps purchased during the three months ended September 30,2005 and 2004, respectively, realizing a net gain/(loss) of $(11)thousand and $312 thousand, respectively.

During the thirdquarter, we terminated our position where we had purchased credit swapsto offset credit risk on certain swaps sold. We realized a loss of $174thousand and no longer maintain any positions of this nature atSeptember 30, 2005.

Net realized gains (losses) for the threemonths ended September 30, 2005 and 2004 are summarizedbelow:

22

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|                                                                                               |  |                               |        |         |  |        |         |         |  |  |
|-----------------------------------------------------------------------------------------------|--|-------------------------------|--------|---------|--|--------|---------|---------|--|--|
| ($in thousands)                                                                               |  | Three monthsendedSeptember30, |
|                                                                                          |  | 2005                          |        | 2004    |
| Realizedgains on terminated credit swaps sold – singlename                              |  | $                             | 201    |    |  | $      | 3,251   |    |
| Realized losses onterminated credit swaps sold – singlename                             |  |                          | (1,264 | )  |  |   | (778    | )  |
| Realized gains onterminated credit swaps purchased as short-terminvestments                   |  |                          | 15     |    |  |   | 346     |    |
| Realized losseson terminated credit swaps purchased as short-terminvestments                  |  |                          | (26    | )  |  |   | (34     | )  |
| Realizedlosses on terminated credit swaps purchased to offset credit risk oncertain swapssold |  |                          | (174   | )  |  |   | — |    |
| Total NetRealized Gains (Losses) on terminated creditswaps                                    |  | $                             | (1,248 | )  |  | $      | 2,785   |    |
|                                                                                               |

NetUnrealized Gains on Credit Swaps

Net unrealized gains on creditswaps were $14.7  million for the three months ended September30, 2005 as compared with $9.7 million for the three months endedSeptember 30, 2004. Unrealized gains on credit swaps reflects thechange in the fair value of our credit swap portfolio during therespective quarter. The increase is primarily due to a larger decreasein market credit swap premium levels experienced during the quarterended September 30, 2005 than September 30, 2004. The unrealized gainson credit swaps sold-single name, credit swaps sold-tranche and creditswaps purchased as short-term investments and for credit risk offsetpurposes for the three months ended September 30, 2005 and 2004 aresummarizedbelow:

|                                                                                                        |  |                                |        |         |  |        |         |         |  |  |
|--------------------------------------------------------------------------------------------------------|--|--------------------------------|--------|---------|--|--------|---------|---------|--|--|
| ($in thousands)                                                                                        |  | Three monthsended September30, |
|                                                                                                   |  | 2005                           |        | 2004    |
| Netunrealized gains on credit swaps sold-singlename                                                    |  |                           | 15,214 |    |  | $      | 10,998  |    |
| Net unrealizedgains/(losses) on credit swapssold-tranche                                               |  |                           | (167   | )  |  |   | — |    |
| Netunrealized gains/(losses) on credit swaps purchased as short-terminvestments                        |  |                           | (455   | )  |  |   | (1,335  | )  |
| Netunrealized gains/(losses on credit swaps purchased to offset creditrisk on certain credit swapssold |  |                           | 143    |    |  |   | (7      | )  |
| TotalNet Unrealized Losses on creditswaps                                                              |  | $                              | 14,735 |    |  | $      | 9,656   |    |
|                                                                                                        |

AssetManagement Fees

We commenced our third party asset managementactivity during the latter part of 2004. For the three months endedSeptember 30, 2005, we recognized $49 thousand of asset managementfees. Our asset management contracts also provide for contingentperformance fees, none of which have been earned or accrued atSeptember 30, 2005. No new third party asset management transactionswere undertaken in the third quarter of 2005.

Interest Incomeon Investment Portfolio

We had interest income of approximately$4.5 million and $1.2 million for the three months ended September 30,2005 and 2004, respectively. The increased interest income is primarilyattributable to higher average invested balances subsequent to the July2004 issuance of subordinated debt and the raising of additional equitythrough our IPO, coupled with higher yields in the cash equivalents andinvestment accounts as compared with the three month period endedSeptember 30, 2004. Average yields on the cash equivalents andavailable-for-sale investments were 3.64% for the three monthperiod ended September 30, 2005 compared with 1.31% for thethree month period ended September 30, 2004. The increase in averageyields is primarily due to a general increase in market interest rates,coupled with an extension in the average duration of our investmentportfolio in 

23

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the third quarter of 2005 to approximately2.1 years versus 0.5 years for the same period in 2004. Our total cash,cash equivalents and available-for-sale securities were approximately$497.5 million and $361 million as of September 30, 2005 and 2004,respectively.

Foreign Currency Revaluation

We startedselling Euro-denominated credit swaps in February 2003 and by September30, 2005, Euro-denominated credit swaps comprised 27.2% of thenotional amount of our credit swaps sold portfolio. Our policy had beento hold the premiums received in Euros in Euro denominated investments,however, in September 2005, we exchanged the majority of our Euro cashholdings for U.S. dollars and invested the proceeds in U.S. dollardenominated securities. The Euro had appreciated in value against theU.S. dollar during the third quarters of 2005 and 2004 resulting in netgains of $55 thousand and $66 thousand for the three months endedSeptember 30, 2005 and 2004, respectively.

OperatingExpenses

Our operating expenses (excluding financing costs)were $6.4  million and $5.9 million for the three months endingSeptember 30, 2005 and 2004, respectively, as summarized below:

|                                               |  |                                |       |        |  |        |       |        |  |  |
|-----------------------------------------------|--|--------------------------------|-------|--------|--|--------|-------|--------|--|--|
| ($in thousands)                               |  | Three monthsended September30, |
|                                          |  | 2005                           |       | 2004   |
| Employeecompensation                          |  | $                              | 3,537 |   |  | $      | 3,858 |   |
| Professionaland legal fees                    |  |                           | 981   |   |  |   | 382   |   |
| Fixed assetdepreciation andamortization       |  |                           | 533   |   |  |   | 494   |   |
| Technology anddata                            |  |                           | 535   |   |  |   | 243   |   |
| Other                                         |  |                           | 805   |   |  |   | 906   |   |
| TotalOperatingExpenses                        |  | $                              | 6,391 |   |  | $      | 5,883 |   |
| Numberof full-time employees, at end ofperiod |  |                           | 33    |   |  |   | 32    |   |
|                                               |

The decrease inemployee compensation over these periods was primarily due to thedecrease in the accrual for performance bonuses and performance-relatedstock compensation. This decrease was offset by a slight increase insalaries expense, due to the increase in number of employees as thebusiness expanded its operations. The increase in professional fees isrelated to the increased insurance expenses, and the increased costsassociated with the requirements of being a public company. Otheroperating expenses include rent, bank fees and investment managementfees, rating agency fees, brokerage expense, travel and entertainment,exchange fees and other administrative expenses.

InterestExpense and Preferred Distributions

For the three months endedSeptember 30, 2005, we incurred $639 thousand of interest expense onthe $75.0 million 30-year subordinated debt that was issued by PrimusFinancial in July 2004. The interest rate for the 30-year subordinateddebt was fixed at 2.57% for a period of one year from theissuance date. Beginning July 23, 2005, the interest rate on thesubordinated debt was set monthly via an auction process. PrimusFinancial also made net distributions of $1.0 million and $403 thousandduring the three months ended September 30, 2005 and 2004,respectively, on the Primus Financial Cumulative Preferred Stock issuedin December 2002. The average rate paid on these securities was4.29% and 2.15% during the three months ended September30, 2005 and 2004, respectively.

Income Taxes

Provision/(benefit) for income taxes was $63 thousand and $(22)thousand for the three months ended September 30, 2005 and 2004,respectively. Primus Guaranty had a net deferred tax asset fully offsetby a valuation allowance of $9.3 million as of December 31, 2004.Primus Asset Management 

24

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entered into a Services Agreement with PrimusFinancial in 2002, whereby Primus Asset Management provides services toPrimus Financial including management, consulting and informationtechnology. In September 2005, Primus Asset Management amended theServices Agreement to reflect the changing nature of the groupstructure and business, specifically Primus Asset Management'sprovision of asset management services to third parties in exchange forfees and to reflect the increasing services provided to Primus Guarantyto support its status as a public company. As a result of the amendedServices Agreement, the deferred tax asset at September 30, 2005decreased to approximately $5.7 million. The Company continues tomaintain a 100 percent valuation allowance against its deferred taxasset because management has determined that it is more likely than notthat the deferred tax asset will not be realized due to Primus AssetManagement's history of net operating losses and inability togenerate future taxable income sufficient to utilize such deferred taxasset.

As previously discussed, it is expected that only theincome of Primus Asset Management and its subsidiary, Primus Re, arelikely to be subject to United States federal and local income taxes.However, were Primus Bermuda to be subject to income tax, at a combinedUnited States federal, New York State and New York City income tax rateof 46%, on its United States GAAP income, then its income taxexpense (excluding interest and penalties) since inception, would havebeen approximately $51.8 million through September 30, 2005, and aprovision of approximately $10.5 million for the three months endedSeptember 30, 2005. These figures assume that Primus Financial is notdeemed to be making distributions to Primus Bermuda; such distributionswould subject Primus Bermuda to an additional United States federalbranch profits tax.

Nine months ended September30, 2005 compared with nine months ended September 30, 2004

Wehad a net gain of $975 thousand and $9.9 million for the nine monthsended September 30, 2005 and 2004, respectively. The net gain in the2005 period was primarily composed of an increase in premiums earned onour growing portfolio of credit swaps and an increase in interestincome during this environment of rising interest rates offset byunrealized losses caused by the depreciation in the value of our creditswap portfolio and an increase in realized losses on credit swaps.

Net Credit Swap Revenue (Loss)

Net credit swap revenue was$15.7 million and $26.2 million for the nine months ended September 30,2005 and 2004, respectively. Net credit swap revenue (loss)includes:

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

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

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

The table below shows the componentparts of net credit swap revenue (loss) for the nine months endedSeptember 30, 2005 and2004:

|                                           |  |                               |         |         |  |        |         |         |  |  |
|-------------------------------------------|--|-------------------------------|---------|---------|--|--------|---------|---------|--|--|
| ($in thousands)                           |  | Nine monthsended September30, |
|                                      |  | 2005                          |         | 2004    |
| Netpremiums earned                        |  | $                             | 37,561  |    |  | $      | 31,004  |    |
| Netrealized gains (losses) on creditswaps |  |                          | (3,052  | )  |  |   | 5,574   |    |
| Net unrealizedlosses on creditswaps       |  |                          | (18,837 | )  |  |   | (10,412 | )  |
| TotalNet Credit SwapRevenue               |  | $                             | 15,672  |    |  | $      | 26,166  |    |
|                                           |

NetPremiums Earned

Net premiums earned were $37.6 million and$31.0 million for the nine months ended September 30, 2005 and 2004,respectively. Net premiums earnedinclude:

|              |                                                         |
|--------------|---------------------------------------------------------|
| •  | Premium income on credit swapssold – single name; |

25

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|              |                                                    |
|--------------|----------------------------------------------------|
| •  | Premium income oncredit swaps sold –tranche; |

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

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

The increase in net premiums earned was primarily driven by theincrease in the size of the credit swaps sold portfolio from the 2004period, slightly offset by an increase in the premiums paid for creditswaps purchased for short-term investment purposes. The table belowshows the component parts of net premiums earned for the nine monthsended September 30, 2005 and2004.

|                                                                                    |  |                               |        |         |  |        |         |         |  |  |
|------------------------------------------------------------------------------------|--|-------------------------------|--------|---------|--|--------|---------|---------|--|--|
| ($in thousands)                                                                    |  | Nine monthsended September30, |
|                                                                               |  | 2005                          |        | 2004    |
| Premiumincome on credit swaps sold-singlename                                      |  | $                             | 38,458 |    |  | $      | 31,600  |    |
| Premium incomeon credit swapssold-tranche                                          |  |                          | 210    |    |  |   | — |    |
| Premiumexpense on credit swaps purchased as short-terminvestments                  |  |                          | (1,040 | )  |  |   | (527    | )  |
| Premiumexpense on credit swaps purchased to offset credit risk on certainswapssold |  |                          | (67    | )  |  |   | (69     | )  |
| TotalNet PremiumsEarned                                                            |  | $                             | 37,561 |    |  | $      | 31,004  |    |
|                                                                                    |

Premiumincome on credit swaps sold-single name increased primarily as a resultof the expansion in our credit swap portfolio. The notional amountsoutstanding of credit swaps sold were $13.0 billion and $9.4 billion atSeptember 30, 2005 and 2004, respectively.

We began to sellprotection in tranche format during the second quarter of 2005, wherebywe sell credit swaps referencing portfolios containing obligations ofmultiple reference entities. Premium income from the tranche sold was$210 thousand for the nine months ended September 30, 2005, and thenotional amount outstanding was $50 million at September 30, 2005.

The premium expense on credit swaps purchased as short-terminvestments was $1,040 thousand and $527 thousand for the nine monthsended September 30, 2005 and 2004, respectively. The notional amountsoutstanding on credit swaps purchased as short-term investments were$358.4 million and $372.9 million at September 30, 2005 and 2004,respectively.

The notional amounts of credit swaps that we hadpurchased to offset credit risk on certain credit swaps sold were zeroand $5.0 million at September 30, 2005 and 2004,respectively.

Net Realized Gains (Losses) on Credit Swaps

We terminated $356.3 million and $759 million notional amount ofcredit swaps sold for the nine months ended September 30, 2005 and2004, respectively. Net realized gains/ (losses) on the earlytermination of credit swaps were $(3.1) million and $5.6 million forthe nine months ended September 30, 2005 and 2004, respectively. Thenet realized losses incurred during 2005 were primarily the result ofour decision to mitigate our exposure to a limited number of referenceentities, which had become the subject of leveraged buy-outs or otherevents, increasing the credit risk of those reference entities.

We realized gains of $790 thousand and $5.4 million for the ninemonths ended September 30, 2005 and 2004, respectively. The decrease inrealized gains is due to the reduced notional amount of terminationsthat took place in the 2005 period. We realized losses of $4.3 millionfor the nine months ended September 30, 2005, of which $4.1 million wascaused by the termination of credit swaps to mitigate our creditexposure, and $791 thousand for the nine months ended September 30,2004.

Where we have purchased credit protection as a short-terminvestment, early termination of the credit swaps is a fundamental partof the business strategy. We terminated $123 million and $226 millionnotional amount of credit swaps purchased during the nine months endedSeptember 30, 2005 and 2004, respectively, realizing net gains of $615thousand and $1.0 million, respectively.

We terminated ourposition where we had purchased credit swaps to offset credit risk oncertain swaps sold during the third quarter of 2005. We realized a lossof $174 thousand upon termination and no longer maintain any positionsof this nature at September 30, 2005.

26

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Net realized gains (losses) for the ninemonths ended September 30, 2005 and 2004 are summarized below:

|                                                                                               |  |                              |        |         |  |        |         |         |  |  |
|-----------------------------------------------------------------------------------------------|--|------------------------------|--------|---------|--|--------|---------|---------|--|--|
| ($in thousands)                                                                               |  | Nine monthsendedSeptember30, |
|                                                                                          |  | 2005                         |        | 2004    |
| Realizedgains on terminated credit swaps sold – singlename                              |  | $                            | 790    |    |  | $      | 5,360   |    |
| Realized losses onterminated credit swaps sold – singlename                             |  |                         | (4,283 | )  |  |   | (791    | )  |
| Realized gains onterminated credit swaps purchased as short-terminvestments                   |  |                         | 671    |    |  |   | 1,086   |    |
| Realizedlosses on terminated credit swaps purchased as short-terminvestments                  |  |                         | (56    | )  |  |   | (81     | )  |
| Realizedlosses on terminated credit swaps purchased to offset credit risk oncertain swapssold |  |                         | (174   | )  |  |   | — |    |
| TotalNet Realized Gains (Losses) on terminated creditswaps                                    |  | $                            | (3,052 | )  |  | $      | 5,574   |    |
|                                                                                               |

NetUnrealized Losses on Credit Swaps

Net unrealized losses oncredit swaps were $18.8  million for the nine months endedSeptember 30, 2005 as compared with $10.4  million for the ninemonths ended September 30, 2004. Unrealized losses on credit swapsreflect the change in the fair value of our credit swap portfolio as aresult of increased premium levels. The increase in unrealized lossesis due in part to a larger increase in market credit swap premiumlevels experienced during the nine months ended September 30, 2005 thanin the same period of 2004. In 2005, we also recorded unrealized losseson certain reference entities that were downgraded or were the subjectof leveraged buy-outs or other events during the period. The unrealizedgains and losses on credit swaps sold-single name, credit swapssold-tranche and credit swaps purchased as short-term investments andfor credit risk offset purposes for the nine months ended September 30,2005 and 2004 are summarizedbelow:

|                                                                                                |  |                               |         |         |  |        |         |         |  |  |
|------------------------------------------------------------------------------------------------|--|-------------------------------|---------|---------|--|--------|---------|---------|--|--|
| ($in thousands)                                                                                |  | Nine monthsended September30, |
|                                                                                           |  | 2005                          |         | 2004    |
| Netunrealized losses on credit swaps sold – singlename                                   |  | $                             | (19,514 | )  |  | $      | (9,254  | )  |
| Netunrealized gains on credit swapssold-tranche                                                |  |                          | 300     |    |  |   | — |    |
| Netunrealized gains/(losses) on credit swaps purchased as short-terminvestments                |  |                          | 171     |    |  |   | (1,198  | )  |
| Netunrealized gains on credit swaps purchased to offset credit riskon certain credit swapssold |  |                          | 206     |    |  |   | 40      |    |
| NetUnrealized Losses on creditswaps                                                            |  | $                             | (18,837 | )  |  | $      | (10,412 | )  |
|                                                                                                |

AssetManagement Fees

We commenced our third party asset managementactivity during the latter part of 2004. For the nine months endedSeptember 30, 2005, we recognized $140 thousand of asset managementfees. Our asset management contracts also provide for contingentperformance fees, none of which have been earned or accrued atSeptember 30, 2005.

Interest Income on InvestmentPortfolio

We had interest income of $11.0 million and $2.5million for the nine months ended September 30, 2005 and 2004,respectively. The increased interest income is attributable to higheraverage invested balances subsequent to the July 2004 issuance ofsubordinated debt and the raising of additional equity through ourSeptember 30, 2004 IPO, coupled with higher yields in the cashequivalents and investment accounts, as compared with the nine monthperiod ended September 30, 

27

----

2004. Average yields on the cash equivalentsand available-for-sale investments were also substantially higher at2.99% in the nine months ended September 30, 2005 compared with1.12 % in the nine months ended September 30, 2004. Thisincrease is primarily due to a general increase in market interestrates, coupled with an extension in the average duration of ourinvestment portfolio during the second and third quarters of 2005. Ourtotal cash, cash equivalents and available-for-sale investments wereapproximately $497.5 million and $361.0 million as of September 30,2005 and 2004, respectively.

Foreign Currency Revaluation

The Euro had depreciated in value against the U.S. dollar during thefirst nine months of 2005 and 2004, respectively, and this depreciationresulted in a net loss of $1.5 million and $40 thousand for the ninemonths ended September 30, 2005 and 2004 ,respectively. As previouslydiscussed, we exchanged the majority of our Euro cash holdings for U.S.dollars in September 2005.

Operating Expenses

Ouroperating expenses (excluding financing costs) were approximately$20.1  million and $17.0 million for the nine months endingSeptember 30, 2005 and 2004, respectively, as summarized below:

|                                               |  |                               |        |        |  |        |        |        |  |  |
|-----------------------------------------------|--|-------------------------------|--------|--------|--|--------|--------|--------|--|--|
| ($in thousands)                               |  | Nine monthsended September30, |
|                                          |  | 2005                          |        | 2004   |
| Employeecompensation                          |  | $                             | 12,139 |   |  | $      | 11,142 |   |
| Professionaland legal fees                    |  |                          | 2,731  |   |  |   | 1,160  |   |
| Fixedasset depreciation andamortization       |  |                          | 1,574  |   |  |   | 1,453  |   |
| Technologyanddata                             |  |                          | 1,250  |   |  |   | 914    |   |
| Other                                         |  |                          | 2,423  |   |  |   | 2,371  |   |
| TotalOperatingExpenses                        |  | $                             | 20,117 |   |  | $      | 17,040 |   |
| Numberof full-time employees, at end ofperiod |  |                          | 33     |   |  |   | 32     |   |
|                                               |

The increase inemployee compensation over these periods was partially due to theincrease in the number of employees as the business expanded itsoperations. In addition, in the first quarter of 2005 we accrued anadditional expense of approximately $800 thousand for the acceleratedcompensation expenses and accelerated vesting of stock related to thedeparture of former employees. Professional and legal fees expenseincludes audit and tax advisor expenses, legal costs and insuranceexpenses. The increase in professional fees is related to increasedcosts associated with the requirements of being a public company. Otheroperating expenses include rent, bank fees and investment managementfees, rating agency fees, brokerage expense, travel and entertainment,exchange fees and other administrative expenses.

InterestExpense and Preferred Distributions

For the nine months endedSeptember 30, 2005, we incurred $1.6 million of interest expense on the$75.0 million 30-year subordinated debt that was issued by PrimusFinancial in July 2004 versus $375 thousand for the nine months endedSeptember 30, 2004. The interest rate for the 30-year subordinated debtwas fixed at 2.57% for a period of one year from the issuancedate. Beginning July 23, 2005, the interest rate on the subordinateddebt was set monthly via an auction process and averaged 3.57%at September 30, 2005. Primus Financial also made net distributions of$2.8 million and $1.6 million during the nine months ended September30, 2005 and 2004, respectively, on the Primus Financial CumulativePreferred Stock issued in December 2002. The average rates paid onthese securities was 3.77% and 1.92% during the ninemonths ended September 30, 2005 and 2004, respectively.

IncomeTaxes

Provision for income taxes was $108 thousand and $95thousand for the nine months ended September 30, 2005 and 2004,respectively. Primus Guaranty had a net deferred tax asset fully offset

28

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by a valuation allowance of $9.3 million asof December 31, 2004. Primus Asset Management entered into a ServicesAgreement with Primus Financial in 2002, whereby Primus AssetManagement provides services to Primus Financial including management,consulting and information technology. In September 2005, the PrimusAsset Management amended the Services Agreement to reflect the changingnature of the group structure and business, specifically Primus AssetManagement's provision of asset management services to thirdparties in exchange for fees and to reflect the increasing servicesprovided to Primus Guaranty to support its status as a public company.As a result of the amended Services Agreement, the deferred tax assetat September 30, 2005 decreased to approximately $5.7 million. TheCompany continues to maintain a 100 percent valuation allowance againstits deferred tax asset because management has determined that it ismore likely than not that the deferred tax asset will not be realizeddue to Primus Asset Management's history of net operating lossesand inability to generate future taxable income sufficient to utilizesuch deferred tax asset.

As previously discussed, it is expectedthat only the income of Primus Asset Management and its subsidiary,Primus Re, are likely to be subject to United States federal and localincome taxes. However, were Primus Bermuda to be subject to income tax,at a combined United States federal, New York State and New York Cityincome tax rate of 46%, on its United States GAAP income, thenits income tax expense (excluding interest and penalties) sinceinception, would have been approximately $51.8 million throughSeptember 30, 2005, and a provision of approximately $1.1 million forthe nine months ended September 30, 2005. These figures assume thatPrimus Financial is not deemed to be making distributions to PrimusBermuda; such distributions would subject Primus Bermuda to anadditional United States federal branch profits tax.

Contractual Obligations

The following table summarizes ourcontractual obligations at September 30, 2005 and the effect that thoseobligations are expected to have on our liquidity and cash flows infutureperiods:

|                                      |  |                     |        |                |  |           |         |           |  |                  |         |           |  |        |         |           |  |        |        |        |  |  |
|--------------------------------------|--|---------------------|--------|----------------|--|-----------|---------|-----------|--|------------------|---------|-----------|--|--------|---------|-----------|--|--------|--------|--------|--|--|
|                                 |  | Paymentdue byperiod |
|                                 |  | Total               |        | Lessthan1 year |  | 1-3 years |         | 3-5 years |  | Morethan 5 years |
| PropertyLease                        |  | $                   | 5,020  |           |  | $         | 378     |      |  | $                | 1,512   |      |  | $      | 1,545   |      |  | $      | 1,585  |   |
| Subordinateddeferrable interestnotes |  |                | 75,000 |           |  |      | — | (a)  |  |             | — | (a)  |  |   | — | (a)  |  |   | 75,000 |   |
| Total                                |  | $                   | 80,020 |           |  | $         | 378     |      |  | $                | 1,512   |      |  | $      | 1,545   |      |  | $      | 76,585 |   |
|                                      |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                         |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------|
| (a) | Payments on the subordinated deferrable interest notes for thenext five years cannot be determined, as it is an auction rateobligation. |

Property Lease:    Primus Financialhas leased its premises at 360 Madison Avenue, New York, New York fromMadison 45 LLC at a fixed yearly rental (subject to certain escalationsspecified in the lease) until August 1, 2012. There are no materialrestrictions imposed by the lease agreement and the lease iscategorized as an operating lease.

Subordinated deferrableinterest notes:    For information on the terms of oursubordinated deferrable interest notes, see Note 6 to our consolidatedfinancial statements.

We have no other material long-termcontractual obligations.

Liquidity and Capital Resources

Capital Strategy

Primus Financial, in order tosupport its AAA/Aaa ratings, is required to maintain capital in anamount determined by the capital models it has agreed upon with S&Pand Moody's. The capital required is primarily a function ofPrimus Financial's credit swap portfolio characteristics,operating expenses and tax position. Retained cash flow and proceedsfrom financings increase our capital resources to support our creditswap business.

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In connection with the commencement ofour operations on March 14, 2002, we were capitalized with $155.0million from the issuance of our Series A preferred stock to twosubsidiaries of XL Capital Ltd, or XL, Transamerica Life InsuranceCompany, a subsidiary of AEGON USA, Pacific Corporate Group/CalPERS andRadian Group Inc., or Radian. In connection with the issuance of theSeries A preferred stock, we issued warrants to Radian enabling them topurchase 1,061,059 common shares at a exercise price of $5.18 pershare. On May 15, 2004, Radian exercised these warrants, as a result ofwhich we received $5.5 million. Upon completion of our IPO, all of theSeries A preferred stock were converted into common shares of thecompany.

Primus Financial issued $110.0 million of PrimusFinancial Cumulative Preferred Stock on December 19, 2002 in twoseries, Series I and Series II, to a trust, ("theTrust"). In conjunction with the receipt of thesecurities, the Trust issued $100.0 million of Money Market PreferredSecurities Custodial Receipts, or MMP Receipts, in two series, Series Aand Series B, to various institutional investors in a privateplacement. The Trust also issued $10.0 million of Variable InversePreferred Securities Custodial Receipts that were retained by PrimusFinancial. One series of MMP Receipts pays distributions every 28 daysbased on an auction rate set on the business day prior to the beginningof the 28 day period and the other series currently makes paymentsquarterly, based on an auction rate, which is currently set annually,and was last set in January 2005. After December 19, 2012, PrimusFinancial may redeem the securities, in whole or in part, on anydistribution date at the face amount plus accumulated and unpaiddividends. However, Primus Financial is not required to redeem thesecurities, nor is it required to establish a sinking fund. For thethree months ended September 30, 2005 and 2004, Primus Financial madenet distributions to the Trust's MMP Receipts of $1.0 million and$403 thousand, respectively. For the nine months ended September 30,2005 and 2004, Primus Financial made net distributions to theTrust's MMP Receipts of $2.8 million and $1.6 million,respectively.

Primus Financial issued $75.0 million ofsubordinated deferrable interest notes on July 23, 2004. The notes aresubordinated in right of payment to the prior payment in full of allexisting and future senior indebtedness of the company, includingcounterparty claims. The notes are redeemable at the option of PrimusFinancial, in whole or in part, on any auction date, at a redemptionprice equal to 100% of the principal amount of the notes to beredeemed, plus any accrued and unpaid interest thereon to theredemption date. The interest rate on the notes was fixed at a rate of2.57% for a period of one year, expiring in July of 2005, afterwhich the rate was set through a monthly auction process. The notesmature in July 2034.

Primus Guaranty completed an IPO on October5, 2004, listing its shares on the NYSE. The company issued 9,143,493shares at a price of $13.50. Proceeds to the company were $110.7million, net of the underwriting discount and offering expenses. PrimusGuaranty concurrently contributed $60.0 million of the IPO proceeds toPrimus Financial to support the growth of its credit swap business.Primus Guaranty has invested the remaining net proceeds in short-termmoney market instruments, pending utilization in its credit swapbusiness and/or other businesses related to the credit markets.

Additionally, as required by our operating guidelines, PrimusFinancial maintains a $37.5 million liquidity facility with HarrisTrust and Savings Bank, or Harris Trust. The purpose of the liquidityfacility is to provide Primus Financial with cash in the event it isobligated to purchase a Reference Entity's debt obligation as theresult of a credit event and could not liquidate its investments inorder to settle a purchase on a timely basis. The liquidity facilityrequires that Primus Financial have United States government securitiesavailable to pledge as collateral on any advances made under thefacility. The facility is renewable on an annual basis at the option ofPrimus Financial or Harris Trust. The facility has a maturity date ofMarch 31, 2006. We intend to request an extension of this facility orreplace it with a similar facility with another lender at each annualmaturity date so long as we are required to do so by the operatingguidelines. We have applied to the rating agencies for permission toterminate this facility. As of September 30, 2005, there have been nocredit events and there have been no borrowings under the facility.

We receive cash from the receipt of credit swap premiums, the netproceeds from the early termination of credit swaps, interest incomeearned on our investment portfolio and capital raising 

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activities. Cash has been used to pay ouroperating expenses, administrative expenses, premiums on credit swapswe have purchased and preferred share distributions. Our cash, cashequivalents and available-for-sale investments were approximately$497.5 million and $482.1  million as of September 30, 2005 andDecember 31, 2004, respectively.

Cash Flows

Cash flows from operating activities – Net cashprovided by operating activities was $23.6 million and $24.9 millionfor the nine months ended September 30, 2005 and 2004, respectively. In2005 we had higher premium income as compared with the 2004 period, dueto the increased size of our credit swaps sold portfolio. However, thisincrease was offset by net realized losses in the first nine months of2005 of $3.1 million, as compared with net realized gains of $5.6million during the same period of 2004. Additionally, there was anincrease in operating expenses in the nine months ended September 30,2005 as compared with the same period of 2004, due to our expandedoperations and costs associated with being a public company.

Cash flows from investing activities – Net cash used ininvesting activities was $(258.7) million and $(26) thousand for thenine months ended September 30, 2005 and 2004, respectively. The mainreason for this increase in use of cash was the purchases ofavailable-for-sale securities during the first nine months of 2005,compared with the sale of investment securities during the same periodof 2004.

Cash flows from financing activities – Netcash (used in) provided by financing activities was $(5.0) million and$75 million for the nine months ended September 30, 2005 and 2004,respectively. This increase in use of cash is partly due to the paymentof $2.5 million in the first quarter of 2005, representing the amountwithheld to pay employee income taxes due upon the delivery of commonshares to our employees, coupled with an increase in preferreddistributions of a subsidiary in the nine months ended September 30,2005. In addition, during the nine months ended September 30, 2004, asubsidiary, Primus Financial, issued long term subordinated debt,raising $74 million, net of issuance costs.

With our currentcapital resources and anticipated future credit swap premium receiptsand interest income, we believe we have sufficient liquidity to pay ouroperating expenses and preferred distributions over at least the nexttwelve months.

Additional Information

U.S. GAAPapplicable to derivative contracts requires us to account for thecredit swaps that we buy or sell at fair value. The fair value ofcredit swaps is primarily determined by market credit swap premiumlevels, as well as the size, tenor and transacted credit swap premiumlevels of our swaps, and interest rates used to discount future cashflows. Premium levels, in turn, are driven by a number of factors,including the number and size of market participants willing to buy orsell credit protection at any given time and the market'sperception of credit risk over the life of a particular credit swap.The latter is in turn a function of macroeconomic factors such as theoverall state of the economy, corporate financial health and leverage,and geopolitical concerns. As a general matter, given our strategy ofholding credit swaps sold until maturity, we do not seek to manage ouroverall exposure to market credit swap premium levels by terminatingcredit swaps prior to their maturity. Accordingly, we expectfluctuations in the fair value of our credit swap portfolio as a resultof changes in credit swap premiums over time. These period-to-periodchanges in value have no significant effect on our business, oureconomic performance or cash flow. However, reflecting our credit swapportfolio at fair value produces significant changes in our revenue andnet income from period to period as the market values of our creditswaps fluctuate.

Despite our strategy of holding credit swapssold to maturity, we occasionally dispose of credit swaps prior tomaturity, but only in circumstances where we believe that theunderlying risk related to the credit swap has increased beyond ourrisk tolerance or where we seek to rebalance our portfolio and creategreater capacity for other credit swaps. Under United States GAAP, thefull amount of any realized gains and losses on the termination ofcredit swaps is included in our revenue immediately.

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In managing our business and assessingits growth and profitability from a strategic and financial planningperspective, we believe it is appropriate to consider both our UnitedStates GAAP financial results as well as the impact on those results offair value accounting and the termination of credit swaps. Therefore,we evaluate what our economic results would have been if we excludedfrom revenue the amounts of any unrealized gains and losses on ourportfolio of credit swaps sold, and any realized gains fromterminations of credit swaps sold prior to maturity, although weamortize those realized gains over the remaining original lives of theterminated contracts. Our board of directors also uses these results inassessing our management's performance and determiningcompensation.

For the three months ended September 30, 2005 and2004, we realized $201 thousand and $3.3 million of gains,respectively, from the early termination of credit swaps sold. Theamortized gains for those periods were $1.7  million and $1.5million, respectively. For the nine months ended September  30,2005 and 2004, we realized $790 thousand and $5.4 million of gains,respectively, from the early termination of credit swaps sold. Theamortized gains for those periods were $5.0  million and $4.5million, respectively. At September 30, 2005, future amortization ofgains from all credit swaps terminated prior to that date will berecognized as follows (in thousands):

|                              |  |        |       |        |  |  |
|------------------------------|--|--------|-------|--------|--|--|
| Yearending December 31, 2005 |  | $      | 6,770 |   |
| Year endingDecember 31, 2006 |  |   | 6,783 |   |
| Year endingDecember 31, 2007 |  |   | 4,620 |   |
| Year endingDecember 31, 2008 |  |   | 452   |   |
| Year ending December31, 2009 |  |   | 29    |   |
| Year ending December 31,2010 |  |   | 6     |   |
|                              |

Recent AccountingPronouncements

In May 2005, the Financial Accounting StandardsBoard ("FASB") issued SFAS 154, AccountingChanges and Error Corrections – a replacement of APB Opinion No.20 and FASB Statement No. 3. This statement requires retrospectiveapplication to prior periods' financial statements of changes inaccounting principle. SFAS 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15,2005. The adoption of SFAS 154 is not expected to have a significantimpact on the Company's financial statements.

In December2004, the FASB issued SFAS No. 123 (R), Share-Based Payment.SFAS No. 123 (R) is a revision of SFAS No. 123, Accounting forStock-Based Compensation, and supersedes Accounting PrinciplesBoard ("APB") Opinion No. 25, Accountingfor Stock Issued to Employees, and amends SFAS No. 95 Statementof Cash Flows. SFAS No. 123 (R) eliminates the ability to accountfor share-based compensation transactions using APB Opinion No. 25 andrequires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the financial statementsusing a fair value-based method. In April 2005, the Securities andExchange Commission ("SEC") amended theeffective date of SFAS No. 123 (R) to provide additional time forcompanies to comply with the reporting requirements. The Company willadopt SFAS No. 123 (R) and does not expect a material impact on theconsolidated financial Statements.

In March 2005, the SEC staffissued Staff Accounting Bulletin No. 107 ("SAB No.107") to provide guidance on SFAS No. 123 (R). SAB No. 107provides the staff's view regarding the valuation of share-basedpayment arrangements for public companies. In particular, this SABprovides guidance related to share-based payment transactions withnon-employees, the transition from non public to public entity status,valuation methods (including assumptions such as expected volatilityand expected term), the accounting for certain redeemable financialinstruments issued under share-based payment arrangements, theclassification of compensation expense, non-GAAP financial measures,first time adoption of SFAS No. 123 (R), the modification of employeeshare options prior to the adoption of SFAS No. 123 (R) and disclosurein Management's Discussion and Analysis subsequent to adoption ofSFAS No. 123 (R). SAB. 107 was effective March 29, 2005. The Companydoes not expect the adoption of this guidance to have a material impacton the consolidated financial statements.

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Cautionary Note RegardingForward-Looking Statements

This quarterly report of PrimusGuaranty includes statements that are not historical or current factsand are "forward-looking statements" madepursuant to the safe harbor provisions of the Private SecuritiesLitigation Reform Act of 1995. The words"believe,""anticipate,""project," "plan,""expect," "intend,""will likely result," "lookingforward" or "will continue," andsimilar expressions identify forward-looking statements. Thesestatements are subject to certain risks and uncertainties that couldcause actual results to differ materially from historical earnings andthose presently anticipated or projected. Primus Guaranty cautionsreaders not to place undue reliance on any such forward-lookingstatements, which speak only to their respective dates. The followingare some of the factors that could affect financial performance orcould cause actual results to differ materially from estimatescontained in or underlying the Company's forward-lookingstatements:

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

|              |                                                                           |
|--------------|---------------------------------------------------------------------------|
| •  | thelevel of activity within the national and international creditmarkets; |

|              |                                           |
|--------------|-------------------------------------------|
| •  | competitive conditions andpricing levels; |

|              |                                         |
|--------------|-----------------------------------------|
| •  | legislative andregulatory developments; |

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

|              |                     |
|--------------|---------------------|
| •  | changes in taxlaws; |

|              |                                                                                                       |
|--------------|-------------------------------------------------------------------------------------------------------|
| •  | changes in international ornational political or economic conditions, including any terroristattacks; |

|              |                                                          |
|--------------|----------------------------------------------------------|
| •  | uncertainties that have notbeen identified at this time. |

The Company undertakes noobligation to publicly correct or update any forward-looking statementif it later becomes aware that such results are not likely to beachieved.

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Item3.    Quantitative and Qualitative Disclosures about Market Risk

Market risk represents the potential for losses that may result fromchanges in the value of a financial instrument as a consequence ofmarket conditions. Our primary market risk is increasing or decreasingcredit swap premium levels, which increase or decrease the fair valueof our credit swap portfolio. Market credit swap premium levels changeas a result of specific events or news related to a Reference Entity,such as a change in a credit rating by any of the rating agencies.Additionally, market credit swap premium levels can vary as a result ofchanges in market sentiment. As a general matter, given our strategy ofholding credit swaps sold until maturity, we do not seek to manage ouroverall exposure to market credit swap premium levels, and we expectfluctuations in the fair value of our credit swap portfolio as a resultof these changes. In cases where we purchase credit swaps as short-terminvestments, we incur the cost of paying premiums until we terminatethe purchased credit protection. We undertake these transactions in theexpectation that the market credit swap premium level for the ReferenceEntity will rise subsequent to our purchase of protection, but anygains realized upon termination may not suffice to offset the premiumexpense we have incurred while holding the purchased credit protection.Indeed, the market credit swap premium level for the Reference Entitymay fall and we may incur termination losses as well as premium expenseas a result. The fair value of our credit swaps purchased will beaffected by market credit swap premium levels, which will affect ournet income. Currently, we purchase a limited amount of creditprotection, relative to the size of our portfolio of credit swaps sold,and the cost of purchased credit protection does not materially impactour overall operating margin. The notional amount outstanding on creditswaps we purchased as short-term investments was $358.4 million atSeptember 30, 2005.

We face other market risks, which are likelyto have a lesser impact upon our net income than those associated withcredit swap premium level risk. These other risks include interest raterisk associated with market interest rate movements. These movementsmay affect the value of our credit swap portfolio as our pricing modelincludes an interest rate component, which is used to discount futureexpected cash flows. Interest rate movements may also affect thecarrying value of our investments.

The Primus FinancialCumulative Preferred Stock pays distributions that are based upon theauction rate preferred market. A difference between the rates we pay inthe auction rate preferred market and the interest rates we receive onour investments may result in an additional cost to our company.Assuming that auction results with respect to the Primus FinancialCumulative Preferred Stock reflect prevailing short-term interestrates, each 25 basis point increase or decrease in the level of thoserates would increase or decrease Primus Financial's annualdistribution cost by approximately $125 thousand for each of the SeriesA and Series B MMP Receipts, but would not affect distributions on theSeries B MMP Receipts as the interest and auction rate for such MMPReceipts were set for a one year period on January 20, 2005.

Inaddition, interest rate movements may increase or decrease the interestexpense we incur on our $75 million of subordinated deferrable interestnotes. A 25 basis point increase or decrease in the level of thoserates would have increased or decreased Primus Financial'sinterest expense by $47 thousand and $141 thousand for the three andnine months ended September 30, 2005, however, during much of thoseperiods the interest rate on the subordinated deferrable interest noteswas fixed for a one year period that expired in July of 2005.

Counterparty risk represents the potential for loss should one ormore of our counterparties be unable to meet its obligations due tobankruptcy or a similar event, which could adversely affect our resultsof operations. Our counterparties generally have investment gradecredit ratings. At September 30, 2005 and 2004, the notional amount ofcredit swaps outstanding with respect to our counterparties that hadcredit ratings of below investment grade were $5.0 million and $5.0million, respectively. The fair value of the above-mentioned creditswaps at September 30, 2005 and 2004 were $42 thousand and $47thousand, respectively. The premiums on these transactions were fullyprepaid by the counterparty.

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Item 4.    Controls and Procedures

The company has carried out an evaluation, under the supervision andwith the participation of the company's management, including theChief Executive Officer and Chief Financial Officer, of theeffectiveness of disclosure controls and procedures pursuant to rules13a-15 and 15-15d promulgated under the Securities and Exchange Act of1934 as of the end of the period covered by this report. Based on thatevaluation, the Chief Executive Officer and the Chief Financial Officerconcluded that the disclosure controls and procedures are effective toprovide reasonable assurance that all material information relating tothe company required to be filed in this report have been made known tothem in a timely fashion. There have been no changes in internalcontrol over financial reporting that occurred during the most recentfiscal quarter that have materially affected, or are reasonably likelyto affect, internal control over financial reporting.

Thecompany's management, including the Chief Executive Officer andthe Chief Financial Officer, does not expect that the company'sdisclosure controls or its internal controls can prevent all errors andall fraud. Further, the design of a control system must reflect thefact that there are resource constraints, and the benefits of controlsmust be considered relative to their costs. As a result of the inherentlimitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances offraud, if any, within the company have been detected. These inherentlimitations include the realities that judgments in decision-making canbe faulty, and that breakdowns can occur because of simple error ormistake. As a result of the inherent limitations in a cost-effectivecontrol system, misstatements due to error or fraud may occur and notbe detected. Accordingly, the company's disclosure controls andprocedures are designed to provide reasonable, not absolute, assurancethat the disclosure controls and procedures are met.

PartII.    Other Information

Item 1.    Legal Proceedings

In the ordinary course of operating our business, we may encounter asignificant risk of litigation from time to time. However, we are notparty to nor currently aware of any material pending litigation.

Item 2.    Unregistered Sales of Equity Securities and Use ofProceeds

Use of Proceeds of Initial PublicOffering

The effective date of our registration statement(Registration No. 333-114818) filed on Form S-1 relating to our IPO ofcommon shares was September 29, 2004. In our IPO, we registered andsold 9,143,493 common shares, par value $.08 per share, at a price of$13.50 per share and an aggregate public offering price of $123,437,156for the account of the Company. In addition, there were registered andsold, for the account of certain selling shareholders identified in theregistration statement, 1,201,335 common shares at a price of $13.50per share and an aggregate public offering price of $16,218,022. OurIPO was managed and underwritten by Lehman Brothers Inc., MorganStanley & Co. Incorporated, Credit Suisse First Boston LLC, UBSInvestment Bank, William Blair & Company L.L.C. and Keefe Bruyette& Woods, Inc. The offering commenced on September 29, 2004 andclosed on October 5, 2004. Proceeds to us from our IPO, after deductionof the underwriting discounts and commissions payable by the company ofapproximately $8.64 million and offering costs payable by the companyof $4.1 million, totaled approximately $110.7 million. None of theexpenses incurred and paid by us in our IPO were direct or indirectpayments to our directors, officers, general partners or theirassociates, to persons owning 10% or more of any class of ourequity securities or, except as described below, to our affiliates. Ofthe $110.7 million raised for the account of the company, approximately$60.0 million has been used to provide additional working capital toour affiliate, Primus Financial, in order to increase its capacity tosell additional credit swaps. Primus Financial has invested thisadditional capital in accordance with its operating guidelines inUnited States government agencies and money market instruments. Wecontinue to expect that the remainder 

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of the proceeds from the offering will beused as working capital and for general corporate purposes, includingproviding additional capital to Primus Financial to enable it tofurther expand its credit swap business and to pursue opportunities incomplementary businesses, such as asset management for third partiesand selling credit swaps referencing a broader range of obligations,although specific amounts have not been allocated for these additionalpurposes. Pending such uses, the balance of $50.7 million has beeninvested by the company in United States government agencies and moneymarket instruments. The occurrence of unforeseen events, opportunitiesor changed business conditions, however, could cause us to use the netproceeds of our IPO in a manner other than as described above.

Item 3.    Defaults upon Senior Securities

None.

Item 4.    Submission of Matters to a Vote of SecurityHolders

We did not submit any matters to a vote of securityholders during the third quarter of 2005.

Item 5.    OtherInformation

None.

Item 6.    Exhibits

|      |  |                                                                                                           |  |  |  |  |
|------|--|-----------------------------------------------------------------------------------------------------------|--|--|--|--|
| 31.1 |  | Rule13a–14(a)/15d–14(a) Certification                                                         |
| 31.2 |  | Rule 13a–14(a)/15d–14(a)Certification                                                         |
| 32.1 |  | Certification Pursuant to18 U.S.C. Section 1350, as Added By Section 906 of the Sarbanes-OxleyAct of 2002 |
|      |

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SIGNATURES

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this Report to be signed on its behalf by the undersigned,thereunto duly authorized.

|        |  |                                                                                                 |  |  |  |  |
|--------|--|-------------------------------------------------------------------------------------------------|--|--|--|--|
|   |  | PRIMUSGUARANTY, LTD.                                                                            |
|   |  | /s/ RichardClaiden                                                                              |
|   |  | RichardClaiden Chief Financial Officer (Duly Authorized Officer andPrincipal Financial Officer) |
|        |

Date: November14, 2005

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