##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2009
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to .
 Commission File Number: 001-32307
 
 Primus Guaranty, Ltd.
  Bermuda
(State or other jurisdiction of 
incorporation or organization)
    
    98-0402357
(I.R.S. Employer Identification No.)
 Clarendon House
2 Church Street
Hamilton HM 11, Bermuda
 441-296-0519
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



Primus Guaranty, Ltd.
 Form 10-Q
  INDEX
 Part I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Statements of Financial Condition as of
June 30, 2009 (Unaudited) and December 31, 2008
    
    
    3Condensed Consolidated Statements of Operations (Unaudited) for the
three and six months ended June 30, 2009 and 2008
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited) for the
six months ended June 30, 2009 and 2008
    
    
    5Condensed Consolidated Statements of Equity (Deficit) (Unaudited) for the
six months ended June 30, 2009 and year ended December 31, 2008
    
    
    6Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    31Cautionary Statement Regarding Forward Looking Information
    
    
    53Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    54Item 4. Controls and Procedures
    
    
    55Part II. Other InformationItem 1. Legal Proceedings
    
    
    56Item 1A. Risk Factors
    
    
    56Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    56Item 4. Submission of Matters to a Vote of Security Holders
    
    
    56Item 6. Exhibits
    
    
    57Signatures
    
    
    58Exhibit 12Exhibit 31.1Exhibit 31.2Exhibit 32
   2




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##### Table of Contents



Part I. Financial Information
 
 Item 1.
    
    Financial Statements
 Primus Guaranty, Ltd.
 
 Condensed Consolidated Statements of Financial Condition
 (in thousands except share amounts)
 June 30,
    
    
    December 31,2009
    
    
    2008(unaudited)AssetsCash and cash equivalents
    
    $
    604,856
    
    
    $
    280,912Available-for-sale investments
    
    
    133,792
    
    
    
    482,930Trading account assets
    
    
    263
    
    
    
    3,940Accrued interest receivable
    
    
    890
    
    
    
    3,704Accrued premiums and receivables on credit swaps
    
    
    2,315
    
    
    
    2,764Fixed assets and software costs, net
    
    
    2,569
    
    
    
    3,308Debt issuance costs, net
    
    
    4,999
    
    
    
    6,153Other assets
    
    
    5,916
    
    
    
    10,520Total assets
    
    $
    755,600
    
    
    $
    794,231Liabilities and Equity (deficit)LiabilitiesAccounts payable and accrued expenses
    
    $
    2,031
    
    
    $
    1,737Accrued compensation
    
    
    1,761
    
    
    
    1,768Interest payable
    
    
    88
    
    
    
    535Unrealized loss on credit swaps, at fair value
    
    
    1,497,947
    
    
    
    2,173,461Payable for credit events
    
    
    2,040
    
    
    
    3,186Long-term debt
    
    
    253,894
    
    
    
    317,535Other liabilities
    
    
    573
    
    
    
    444Total liabilities
    
    
    1,758,334
    
    
    
    2,498,666Commitments and contingenciesEquity (deficit)Common shares, $0.08 par value, 62,500,000
shares authorized, 40,352,509 and 40,781,538
shares issued and outstanding at June 30, 2009
and December 31, 2008
    
    
    3,228
    
    
    
    3,263Additional paid-in capital
    
    
    286,305
    
    
    
    281,596Accumulated other comprehensive income (loss)
    
    
    (382
    )
    
    
    908Retained earnings (deficit)
    
    
    (1,384,987
    )
    
    
    (2,088,723
    )Total shareholders equity (deficit) of
Primus Guaranty, Ltd.
    
    
    (1,095,836
    )
    
    
    (1,802,956
    )Preferred securities of subsidiary
    
    
    93,102
    
    
    
    98,521Total equity (deficit)
    
    
    (1,002,734
    )
    
    
    (1,704,435
    )Total liabilities and equity (deficit)
    
    $
    755,600
    
    
    $
    794,231
 See accompanying notes.
  3




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Primus Guaranty, Ltd.
 
 Condensed Consolidated Statements of Operations
 (in thousands except per share amounts)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(unaudited)
    
    
    (unaudited)RevenuesNet credit swap revenue (loss)
    
    $
    571,883
    
    
    $
    270,990
    
    
    $
    682,764
    
    
    $
    (392,625
    )Asset management and advisory fees
    
    
    387
    
    
    
    1,090
    
    
    
    806
    
    
    
    2,180Interest income
    
    
    1,125
    
    
    
    6,319
    
    
    
    3,498
    
    
    
    15,513Gain on retirement of long-term debt
    
    
    33,189
    
    
    
    
    
    
    
    38,948
    
    
    
    Impairment losses on available-for-sale investments
    
    
    (152
    )
    
    
    
    
    
    
    (761
    )
    
    
    Other
    
    
    2,550
    
    
    
    (102
    )
    
    
    2,474
    
    
    
    (127
    )Total net revenues (losses)
    
    
    608,982
    
    
    
    278,297
    
    
    
    727,729
    
    
    
    (375,059
    )ExpensesCompensation and employee benefits
    
    
    4,566
    
    
    
    5,964
    
    
    
    9,281
    
    
    
    12,155Professional and legal fees
    
    
    1,957
    
    
    
    1,281
    
    
    
    3,378
    
    
    
    2,304Depreciation and amortization
    
    
    251
    
    
    
    334
    
    
    
    509
    
    
    
    663Technology and data
    
    
    732
    
    
    
    900
    
    
    
    1,550
    
    
    
    2,011Interest expense
    
    
    2,310
    
    
    
    3,973
    
    
    
    5,068
    
    
    
    8,864Other
    
    
    1,163
    
    
    
    1,300
    
    
    
    2,046
    
    
    
    2,623Total expenses
    
    
    10,979
    
    
    
    13,752
    
    
    
    21,832
    
    
    
    28,620Income (loss) before provision for income taxes
    
    
    598,003
    
    
    
    264,545
    
    
    
    705,897
    
    
    
    (403,679
    )Provision (benefit) for income taxes
    
    
    5
    
    
    
    
    
    
    
    147
    
    
    
    49Net income (loss)
    
    
    597,998
    
    
    
    264,545
    
    
    
    705,750
    
    
    
    (403,728
    )Distributions on preferred securities of subsidiary
    
    
    1,070
    
    
    
    1,942
    
    
    
    2,014
    
    
    
    3,747Net income (loss) available to common shares
    
    $
    596,928
    
    
    $
    262,603
    
    
    $
    703,736
    
    
    $
    (407,475
    )Income (loss) per common share:Basic
    
    $
    14.76
    
    
    $
    5.81
    
    
    $
    17.31
    
    
    $
    (9.02
    )Diluted
    
    $
    14.46
    
    
    $
    5.78
    
    
    $
    17.12
    
    
    $
    (9.02
    )Average common shares outstanding:Basic
    
    
    40,430
    
    
    
    45,225
    
    
    
    40,646
    
    
    
    45,166Diluted
    
    
    41,268
    
    
    
    45,406
    
    
    
    41,096
    
    
    
    45,166
 See accompanying notes.
  4




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Primus Guaranty, Ltd.
 
 Condensed Consolidated Statements of Cash Flows
 (in thousands)
 Six Months EndedJune 30,2009
    
    
    2008(unaudited)Cash flows from operating activitiesNet income (loss) available to common shares
    
    $
    703,736
    
    
    $
    (407,475
    )Distributions on preferred securities of subsidiary
    
    
    2,014
    
    
    
    3,747Net income (loss)
    
    
    705,750
    
    
    
    (403,728
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Non-cash items included in net loss:Depreciation and amortization
    
    
    509
    
    
    
    663Share compensation
    
    
    2,039
    
    
    
    2,573Net unrealized losses on credit and other swaps
    
    
    (675,514
    )
    
    
    442,028Net amortization of premium and discount on
securities
    
    
    (354
    )
    
    
    (1,128
    )Gain on retirement of long-term debt
    
    
    (38,948
    )
    
    
    Impairment losses on available-for-sale investments
    
    
    761
    
    
    
    Amortization of debt issuance costs
    
    
    132
    
    
    
    156Loss on disposal of assets
    
    
    286
    
    
    
    Increase (decrease) in cash resulting from changes in:Accrued interest receivable
    
    
    2,814
    
    
    
    1,550Accrued premiums and receivables on credit swaps
    
    
    449
    
    
    
    717Other assets
    
    
    (632
    )
    
    
    865Trading account assets
    
    
    3,677
    
    
    
    Accounts payable and accrued expenses
    
    
    294
    
    
    
    Accrued compensation
    
    
    (7
    )
    
    
    (1,253
    )Payable for credit events
    
    
    (1,146
    )
    
    
    Interest payable
    
    
    (447
    )
    
    
    (462
    )Accrued premiums and payables on credit and
other swaps
    
    
    
    
    
    
    (1,770
    )Restructuring liabilities
    
    
    
    
    
    
    (1,709
    )Other liabilities
    
    
    129
    
    
    
    (6
    )Net cash provided by (used in) operating activities
    
    
    (208
    )
    
    
    38,496Cash flows from investing activitiesFixed asset purchases and capitalized software costs
    
    
    (56
    )
    
    
    (477
    )Payments received from CLO investments
    
    
    94
    
    
    
    2,063Purchases of available-for-sale investments
    
    
    (20,566
    )
    
    
    (1,059,776
    )Maturities and sales of available-for-sale investments
    
    
    367,796
    
    
    
    1,084,890Net cash provided by investing activities
    
    
    347,268
    
    
    
    26,700Cash flows from financing activitiesRetirement of long-term debt
    
    
    (18,435
    )
    
    
    Purchase and retirement of common shares
    
    
    (1,876
    )
    
    
    (195
    )Purchase of preferred securities of subsidiary
    
    
    (908
    )
    
    
    Net preferred distributions of subsidiary
    
    
    (2,014
    )
    
    
    (3,747
    )Net cash used in financing activities
    
    
    (23,233
    )
    
    
    (3,942
    )Net effect of exchange rate changes on cash
    
    
    117
    
    
    
    (61
    )Net increase in cash
    
    
    323,944
    
    
    
    61,193Cash and cash equivalents at beginning of period
    
    
    280,912
    
    
    
    242,665Cash and cash equivalents at end of period
    
    $
    604,856
    
    
    $
    303,858Supplemental disclosuresCash paid for interest
    
    $
    5,387
    
    
    $
    9,171Cash paid for taxes
    
    $
    11
    
    
    $
    25
 See accompanying notes.
  5




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Primus Guaranty, Ltd.
 
 Condensed Consolidated Statements of Equity (Deficit)
 (in thousands)
 Six Months Ended
    
    
    Year EndedJune 30, 2009
    
    
    December 31, 2008(unaudited)Common sharesBalance at beginning of period
    
    $
    3,263
    
    
    $
    3,603Shares purchased and retired
    
    
    (81
    )
    
    
    (359
    )Shares vested under employee compensation plans
    
    
    46
    
    
    
    19Balance at end of period
    
    
    3,228
    
    
    
    3,263Additional paid-in capitalBalance at beginning of period
    
    
    281,596
    
    
    
    280,224Common shares purchased and retired
    
    
    (1,689
    )
    
    
    (3,220
    )Shares vested under employee compensation plans
    
    
    1,887
    
    
    
    4,592Preferred shares purchased by subsidiary
    
    
    4,511
    
    
    
    Balance at end of period
    
    
    286,305
    
    
    
    281,596Accumulated other comprehensive income (loss)Balance at beginning of period
    
    
    908
    
    
    
    (4,712
    )Foreign currency translation adjustments
    
    
    117
    
    
    
    (447
    )Change in unrealized holding gains (losses) on
available-for-sale securities
    
    
    (1,407
    )
    
    
    6,067Balance at end of period
    
    
    (382
    )
    
    
    908Retained earnings (deficit)Balance at beginning of period
    
    
    (2,088,723
    )
    
    
    (372,577
    )Net income (loss)
    
    
    705,750
    
    
    
    (1,709,504
    )Distributions on preferred securities of subsidiary
    
    
    (2,014
    )
    
    
    (6,642
    )Balance at end of period
    
    
    (1,384,987
    )
    
    
    (2,088,723
    )Total shareholders equity (deficit) of Primus
Guaranty, Ltd.
    
    
    (1,095,836
    )
    
    
    (1,802,956
    )Preferred securities of subsidiaryBalance at beginning of period
    
    
    98,521
    
    
    
    98,521Net purchase of preferred shares
    
    
    (5,419
    )
    
    
    Balance at end of period
    
    
    93,102
    
    
    
    98,521Total equity (deficit) at end of period
    
    $
    (1,002,734
    )
    
    $
    (1,704,435
    )
 See accompanying notes.
  6




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Primus Guaranty, Ltd.
 
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 1. Organization and Basis of Presentation
       7




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Disclosures about Segments
of an Enterprise and Related Information.
   2. Accounting Pronouncements
 Business Combinations Accounting for Assets Acquired and Liabilities Assumed in a Business
Combinations That Arise from Contingencies
  8




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Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51
 Disclosures about Derivative Instruments and
Hedging Activities, an Amendment of FASB Statement No. 133 Accounting for Derivative Instruments and Hedging Activities
 Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in
Variable Interest Entities
 Amendments to the Impairment Guidance of
EITF No. 99-20. Accounting for Certain Investments in Debt and Equity Securities.
  9




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Recognition and Presentation
of Other-Than-Temporary Impairments.
 Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly.
 Interim Disclosures about Fair
Value of Financial Instruments Disclosures about Fair Value of Financial Instruments,
 Subsequent Events
 Amendments to FIN 46(R)
 The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB Statement No. 162
  10




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##### Table of Contents



3. Available-for-Sale Investments
 .
  June 30, 2009Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueU.S. government agency obligations
    
    $
    108,580
    
    
    $
    158
    
    
    $
    (3
    )
    
    $
    108,735Corporate debt securities
    
    
    25,450
    
    
    
    135
    
    
    
    (528
    )
    
    
    25,057Total
    
    $
    134,030
    
    
    $
    293
    
    
    $
    (531
    )
    
    $
    133,792
 December 31, 2008Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueU.S. government agency obligations
    
    $
    458,909
    
    
    $
    2,016
    
    
    $
    (39
    )
    
    $
    460,886Collateralized loan obligations
    
    
    791
    
    
    
    
    
    
    
    
    
    
    
    791Corporate debt securities
    
    
    22,076
    
    
    
    84
    
    
    
    (912
    )
    
    
    21,248ABS
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5Total
    
    $
    481,781
    
    
    $
    2,100
    
    
    $
    (951
    )
    
    $
    482,930
  June 30, 2009Securities with Unrealized LossesLess than 12 Months
    
    
    12 Months or More
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesU.S. government agency obligations
    
    $
    
    
    
    $
    
    
    
    $
    24,999
    
    
    $
    (3
    )
    
    $
    24,999
    
    
    $
    (3
    )Corporate debt securities
    
    
    
    
    
    
    
    
    
    
    5,897
    
    
    
    (528
    )
    
    
    5,897
    
    
    
    (528
    )Total
    
    $
    
    
    
    $
    
    
    
    $
    30,896
    
    
    $
    (531
    )
    
    $
    30,896
    
    
    $
    (531
    )
  11




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December 31, 2008Securities with Unrealized LossesLess than 12 Months
    
    
    12 Months or More
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesU.S. government agency obligations
    
    $
    24,968
    
    
    $
    (39
    )
    
    $
    
    
    
    $
    
    
    
    $
    24,968
    
    
    $
    (39
    )Corporate debt securities
    
    
    17,364
    
    
    
    (912
    )
    
    
    
    
    
    
    
    
    
    
    17,364
    
    
    
    (912
    )Total
    
    $
    42,332
    
    
    $
    (951
    )
    
    $
    
    
    
    $
    
    
    
    $
    42,332
    
    
    $
    (951
    )
     12




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##### Table of Contents



4. Net Credit Swap Revenue (Loss) and Portfolio
 Overview
       13




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Consolidated Net Credit Swap Revenue (Loss) and Credit Swap Portfolio Information
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net premium income
    
    $
    22,234
    
    
    $
    27,239
    
    
    $
    44,703
    
    
    $
    54,550Net realized losses
    
    
    (2,975
    )
    
    
    (898
    )
    
    
    (37,453
    )
    
    
    (5,051
    )Net change in unrealized gains (losses)
    
    
    552,624
    
    
    
    244,649
    
    
    
    675,514
    
    
    
    (442,124
    )Net credit swap revenue (loss)
    
    $
    571,883
    
    
    $
    270,990
    
    
    $
    682,764
    
    
    $
    (392,625
    )
  14




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June 30,
    
    
    December 31,2009
    
    
    2008Gross Notional Amounts:Credit swaps sold-single name
    
    $
    16,268,579
    
    
    $
    17,477,946Credit swaps sold-tranche
    
    
    5,000,000
    
    
    
    5,000,000CDS on ABS
    
    
    40,000
    
    
    
    67,654Credit swaps purchased-single name
    
    
    (11,740
    )
    
    
    (11,740
    )Fair Value:Liability
    
    
    1,497,947
    
    
    
    2,173,461Average Fair Value:Asset
    
    
    
    
    
    
    495Liability
    
    
    1,791,457
    
    
    
    1,321,799
    15




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June 30, 2009
    
    
    December 31, 2008Notional
    
    
    Fair
    
    
    Notional
    
    
    FairMoodyrs Rating Category
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueBy Single Name Reference
Entity/TrancheCredit Swaps Sold-Single Name:Aaa
    
    $
    211,215
    
    
    $
    (2,075
    )
    
    $
    525,812
    
    
    $
    (19,442
    )Aa
    
    
    2,370,805
    
    
    
    (51,301
    )
    
    
    2,815,912
    
    
    
    (83,984
    )A
    
    
    5,647,459
    
    
    
    (81,519
    )
    
    
    5,825,968
    
    
    
    (162,262
    )Baa
    
    
    6,189,215
    
    
    
    (121,755
    )
    
    
    6,629,514
    
    
    
    (321,765
    )Ba
    
    
    1,085,931
    
    
    
    (62,611
    )
    
    
    1,168,506
    
    
    
    (128,516
    )B
    
    
    344,739
    
    
    
    (36,087
    )
    
    
    253,422
    
    
    
    (30,355
    )Caa
    
    
    207,000
    
    
    
    (44,696
    )
    
    
    112,812
    
    
    
    (47,423
    )Ca
    
    
    
    
    
    
    
    
    
    
    105,000
    
    
    
    (48,506
    )C
    
    
    201,215
    
    
    
    (125,920
    )
    
    
    35,000
    
    
    
    (3,189
    )D
    
    
    11,000
    
    
    
    (5,172
    )
    
    
    6,000
    
    
    
    (782
    )Total
    
    $
    16,268,579
    
    
    $
    (531,136
    )
    
    $
    17,477,946
    
    
    $
    (846,224
    )Credit Swaps Sold-Tranche:Aaa
    
    $
    1,200,000
    
    
    $
    (60,612
    )
    
    $
    2,700,000
    
    
    $
    (495,997
    )Aa
    
    
    2,100,000
    
    
    
    (370,037
    )
    
    
    1,350,000
    
    
    
    (386,705
    )A
    
    
    400,000
    
    
    
    (92,986
    )
    
    
    200,000
    
    
    
    (73,091
    )Baa
    
    
    650,000
    
    
    
    (160,950
    )
    
    
    600,000
    
    
    
    (231,999
    )Ba
    
    
    500,000
    
    
    
    (166,787
    )
    
    
    
    
    
    
    B
    
    
    
    
    
    
    
    
    
    
    150,000
    
    
    
    (88,725
    )Caa
    
    
    150,000
    
    
    
    (90,621
    )
    
    
    
    
    
    
    Total
    
    $
    5,000,000
    
    
    $
    (941,993
    )
    
    $
    5,000,000
    
    
    $
    (1,276,517
    )CDS on ABS:A
    
    $
    
    
    
    $
    
    
    
    $
    5,000
    
    
    $
    (2,530
    )Baa
    
    
    5,000
    
    
    
    (3,089
    )
    
    
    15,000
    
    
    
    (11,089
    )Ba
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    (3,607
    )C
    
    
    35,000
    
    
    
    (25,275
    )
    
    
    42,654
    
    
    
    (36,193
    )Total
    
    $
    40,000
    
    
    $
    (28,364
    )
    
    $
    67,654
    
    
    $
    (53,419
    )Credit Swaps Purchased-Single Name:A
    
    $
    (4,120
    )
    
    $
    208
    
    
    $
    (4,120
    )
    
    $
    536Baa
    
    
    
    
    
    
    
    
    
    
    (3,580
    )
    
    
    474Ba
    
    
    (3,580
    )
    
    
    1,243
    
    
    
    (4,040
    )
    
    
    1,689Caa
    
    
    (4,040
    )
    
    
    2,095
    
    
    
    
    
    
    
    Total
    
    $
    (11,740
    )
    
    $
    3,546
    
    
    $
    (11,740
    )
    
    $
    2,699
  16




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##### Table of Contents



June 30, 2009
    
    
    December 31, 2008Notional
    
    
    Fair
    
    
    Notional
    
    
    FairMoodys Rating Category
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueBy Counterparty Buyer / (Seller)Credit Swaps Sold-Single Name:Aaa
    
    $
    10,000
    
    
    $
    (216
    )
    
    $
    2,411,228
    
    
    $
    (94,793
    )Aa
    
    
    12,375,686
    
    
    
    (401,122
    )
    
    
    11,930,958
    
    
    
    (573,250
    )A
    
    
    2,475,546
    
    
    
    (74,491
    )
    
    
    1,746,917
    
    
    
    (100,189
    )Baa
    
    
    80,000
    
    
    
    (737
    )
    
    
    
    
    
    
    Non rated
    
    
    1,327,347
    
    
    
    (54,570
    )
    
    
    1,388,843
    
    
    
    (77,992
    )Total
    
    $
    16,268,579
    
    
    $
    (531,136
    )
    
    $
    17,477,946
    
    
    $
    (846,224
    )Credit Swaps Sold-Tranche:Aa
    
    $
    4,550,000
    
    
    $
    (832,237
    )
    
    $
    4,550,000
    
    
    $
    (1,132,176
    )A
    
    
    450,000
    
    
    
    (109,756
    )
    
    
    450,000
    
    
    
    (144,341
    )Total
    
    $
    5,000,000
    
    
    $
    (941,993
    )
    
    $
    5,000,000
    
    
    $
    (1,276,517
    )CDS on ABS:Aa
    
    $
    5,000
    
    
    $
    (3,679
    )
    
    $
    43,494
    
    
    $
    (32,519
    )A
    
    
    30,000
    
    
    
    (20,583
    )
    
    
    19,160
    
    
    
    (17,093
    )Non rated
    
    
    5,000
    
    
    
    (4,102
    )
    
    
    5,000
    
    
    
    (3,807
    )Total
    
    $
    40,000
    
    
    $
    (28,364
    )
    
    $
    67,654
    
    
    $
    (53,419
    )Credit Swaps Purchased-Single Name:Aa
    
    $
    (11,740
    )
    
    $
    3,546
    
    
    $
    (11,740
    )
    
    $
    2,699Total
    
    $
    (11,740
    )
    
    $
    3,546
    
    
    $
    (11,740
    )
    
    $
    2,699
  17




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##### Table of Contents



June 30, 2009
    
    
    December 31, 2008Notional
    
    
    Fair
    
    
    Notional
    
    
    FairS&P Rating Category
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueBy Single Name Reference
Entity/TrancheCredit Swaps Sold-Single Name:AAA
    
    $
    446,215
    
    
    $
    (19,408
    )
    
    $
    555,812
    
    
    $
    (19,594
    )AA
    
    
    1,836,277
    
    
    
    (28,679
    )
    
    
    2,276,042
    
    
    
    (78,128
    )A
    
    
    6,549,855
    
    
    
    (100,764
    )
    
    
    6,984,696
    
    
    
    (200,543
    )BBB
    
    
    5,797,132
    
    
    
    (109,347
    )
    
    
    6,427,687
    
    
    
    (336,933
    )BB
    
    
    970,195
    
    
    
    (89,788
    )
    
    
    722,933
    
    
    
    (71,601
    )B
    
    
    315,657
    
    
    
    (28,937
    )
    
    
    289,246
    
    
    
    (71,219
    )CCC
    
    
    126,033
    
    
    
    (16,049
    )
    
    
    180,530
    
    
    
    (64,235
    )CC
    
    
    216,215
    
    
    
    (132,992
    )
    
    
    
    
    
    
    C
    
    
    
    
    
    
    
    
    
    
    35,000
    
    
    
    (3,189
    )D
    
    
    11,000
    
    
    
    (5,172
    )
    
    
    6,000
    
    
    
    (782
    )Total
    
    $
    16,268,579
    
    
    $
    (531,136
    )
    
    $
    17,477,946
    
    
    $
    (846,224
    )Credit Swaps Sold-Tranche:AAA
    
    $
    1,900,000
    
    
    $
    (181,496
    )
    
    $
    3,600,000
    
    
    $
    (738,361
    )AA
    
    
    1,000,000
    
    
    
    (182,302
    )
    
    
    450,000
    
    
    
    (144,341
    )A
    
    
    800,000
    
    
    
    (159,837
    )
    
    
    100,000
    
    
    
    (37,107
    )BBB
    
    
    650,000
    
    
    
    (160,950
    )
    
    
    500,000
    
    
    
    (187,384
    )BB
    
    
    300,000
    
    
    
    (96,565
    )
    
    
    200,000
    
    
    
    (80,599
    )B
    
    
    200,000
    
    
    
    (70,222
    )
    
    
    100,000
    
    
    
    (60,460
    )CCC
    
    
    150,000
    
    
    
    (90,621
    )
    
    
    50,000
    
    
    
    (28,265
    )Total
    
    $
    5,000,000
    
    
    $
    (941,993
    )
    
    $
    5,000,000
    
    
    $
    (1,276,517
    )CDS on ABS:BBB
    
    $
    15,000
    
    
    $
    (10,870
    )
    
    $
    15,000
    
    
    $
    (10,828
    )BB
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    (6,727
    )B
    
    
    10,000
    
    
    
    (5,697
    )
    
    
    10,000
    
    
    
    (6,597
    )CCC
    
    
    5,000
    
    
    
    (3,686
    )
    
    
    10,000
    
    
    
    (7,747
    )CC
    
    
    10,000
    
    
    
    (8,111
    )
    
    
    22,654
    
    
    
    (21,520
    )Total
    
    $
    40,000
    
    
    $
    (28,364
    )
    
    $
    67,654
    
    
    $
    (53,419
    )Credit Swaps Purchased-Single Name:A
    
    $
    (4,120
    )
    
    $
    208
    
    
    $
    (4,120
    )
    
    $
    536BBB
    
    
    
    
    
    
    
    
    
    
    (7,620
    )
    
    
    2,163BB
    
    
    (4,040
    )
    
    
    2,095
    
    
    
    
    
    
    
    B
    
    
    (3,580
    )
    
    
    1,243
    
    
    
    
    
    
    
    Total
    
    $
    (11,740
    )
    
    $
    3,546
    
    
    $
    (11,740
    )
    
    $
    2,699
  18




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##### Table of Contents



June 30, 2009
    
    
    December 31, 2008Notional
    
    
    Fair
    
    
    Notional
    
    
    FairS&P Rating Category
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueBy Counterparty Buyer / (Seller)Credit Swaps Sold-Single Name:AA
    
    $
    5,142,258
    
    
    $
    (169,133
    )
    
    $
    7,620,037
    
    
    $
    (350,248
    )A
    
    
    9,798,974
    
    
    
    (307,433
    )
    
    
    8,469,066
    
    
    
    (417,984
    )Non rated
    
    
    1,327,347
    
    
    
    (54,570
    )
    
    
    1,388,843
    
    
    
    (77,992
    )Total
    
    $
    16,268,579
    
    
    $
    (531,136
    )
    
    $
    17,477,946
    
    
    $
    (846,224
    )Credit Swaps Sold-Tranche:AA
    
    $
    2,750,000
    
    
    $
    (438,913
    )
    
    $
    2,850,000
    
    
    $
    (640,545
    )A
    
    
    1,800,000
    
    
    
    (393,324
    )
    
    
    2,150,000
    
    
    
    (635,972
    )BBB
    
    
    450,000
    
    
    
    (109,756
    )
    
    
    
    
    
    
    Total
    
    $
    5,000,000
    
    
    $
    (941,993
    )
    
    $
    5,000,000
    
    
    $
    (1,276,517
    )CDS on ABS:A
    
    $
    35,000
    
    
    $
    (24,262
    )
    
    $
    62,654
    
    
    $
    (49,612
    )Non rated
    
    
    5,000
    
    
    
    (4,102
    )
    
    
    5,000
    
    
    
    (3,807
    )Total
    
    $
    40,000
    
    
    $
    (28,364
    )
    
    $
    67,654
    
    
    $
    (53,419
    )Credit Swaps Purchased-Single Name:A
    
    $
    (11,740
    )
    
    $
    3,546
    
    
    $
    (11,740
    )
    
    $
    2,699Total
    
    $
    (11,740
    )
    
    $
    3,546
    
    
    $
    (11,740
    )
    
    $
    2,699
  19




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##### Table of Contents



June 30, 2009
    
    
    December 31, 2008Notional
    
    
    Fair
    
    
    Notional
    
    
    FairCountry of Domicile
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueCredit Swaps Sold-Single NameBy Reference Entity:North America
    
    $
    8,526,297
    
    
    
    (378,369
    )
    
    $
    9,135,739
    
    
    
    (481,009
    )Europe
    
    
    6,871,282
    
    
    
    (135,585
    )
    
    
    7,456,207
    
    
    
    (314,651
    )Asia-Pacific
    
    
    692,000
    
    
    
    (13,540
    )
    
    
    707,000
    
    
    
    (38,839
    )Others
    
    
    179,000
    
    
    
    (3,642
    )
    
    
    179,000
    
    
    
    (11,725
    )Total
    
    $
    16,268,579
    
    
    
    (531,136
    )
    
    $
    17,477,946
    
    
    
    (846,224
    )By Counterparty:North America
    
    $
    8,327,929
    
    
    
    (273,521
    )
    
    $
    8,872,732
    
    
    
    (439,704
    )Europe
    
    
    7,803,650
    
    
    
    (255,972
    )
    
    
    8,463,214
    
    
    
    (401,245
    )Asia-Pacific
    
    
    132,000
    
    
    
    (1,641
    )
    
    
    132,000
    
    
    
    (5,203
    )Others
    
    
    5,000
    
    
    
    (2
    )
    
    
    10,000
    
    
    
    (72
    )Total
    
    $
    16,268,579
    
    
    $
    (531,136
    )
    
    $
    17,477,946
    
    
    $
    (846,224
    )Credit Swaps Sold -TrancheBy Counterparty:North America
    
    $
    600,000
    
    
    
    (104,365
    )
    
    $
    600,000
    
    
    
    (143,205
    )Europe
    
    
    4,400,000
    
    
    
    (837,628
    )
    
    
    4,400,000
    
    
    
    (1,133,312
    )Total
    
    $
    5,000,000
    
    
    
    (941,993
    )
    
    $
    5,000,000
    
    
    
    (1,276,517
    )CDS on ABSBy Reference Entity:North America
    
    $
    40,000
    
    
    
    (28,364
    )
    
    $
    67,654
    
    
    
    (53,419
    )Total
    
    $
    40,000
    
    
    
    (28,364
    )
    
    $
    67,654
    
    
    
    (53,419
    )By Counterparty:North America
    
    $
    30,000
    
    
    
    (20,999
    )
    
    $
    38,494
    
    
    
    (27,695
    )Europe
    
    
    10,000
    
    
    
    (7,365
    )
    
    
    29,160
    
    
    
    (25,724
    )Total
    
    $
    40,000
    
    
    
    (28,364
    )
    
    $
    67,654
    
    
    
    (53,419
    )Credit Swaps Purchased-Single NameBy Reference Entity:North America
    
    $
    (11,740
    )
    
    
    3,546
    
    
    $
    (11,740
    )
    
    
    2,699Total
    
    $
    (11,740
    )
    
    
    3,546
    
    
    $
    (11,740
    )
    
    
    2,699By Counterparty:Europe
    
    $
    (11,740
    )
    
    
    3,546
    
    
    $
    (11,740
    )
    
    
    2,699Total
    
    $
    (11,740
    )
    
    
    3,546
    
    
    $
    (11,740
    )
    
    
    2,699
  20




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##### Table of Contents



June 30, 2009
    
    
    December 31, 2008Notional
    
    
    Fair
    
    
    Notional
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueCredit Swaps Sold-Single NameYear of Maturity2009
    
    $
    1,401,103
    
    
    $
    (8,542
    )
    
    $
    2,628,795
    
    
    $
    (43,412
    )2010
    
    
    5,809,078
    
    
    
    (139,408
    )
    
    
    5,815,475
    
    
    
    (231,783
    )2011
    
    
    2,780,124
    
    
    
    (157,617
    )
    
    
    2770,195
    
    
    
    (187,662
    )2012
    
    
    5,118,640
    
    
    
    (202,499
    )
    
    
    5,106,916
    
    
    
    (325,565
    )2013
    
    
    1,159,634
    
    
    
    (23,070
    )
    
    
    1,156,565
    
    
    
    (57,802
    )Total
    
    $
    16,268,579
    
    
    $
    (531,136
    )
    
    $
    17,477,946
    
    
    $
    (846,224
    )Credit Swaps Sold-TrancheYear of Maturity2012
    
    $
    1,000,000
    
    
    $
    (31,374
    )
    
    $
    1,000,000
    
    
    $
    (70,593
    )2013
    
    
    350,000
    
    
    
    (149,160
    )
    
    
    350,000
    
    
    
    (167,083
    )2014
    
    
    3,650,000
    
    
    
    (761,459
    )
    
    
    3,650,000
    
    
    
    (1,038,841
    )Total
    
    $
    5,000,000
    
    
    $
    (941,993
    )
    
    $
    5,000,000
    
    
    $
    (1,276,517
    )CDS on ABSYear of Maturity2009
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2010
    
    
    20,000
    
    
    
    (15,899
    )
    
    
    10,000
    
    
    
    (6,597
    )2011
    
    
    10,000
    
    
    
    (6,768
    )
    
    
    5,000
    
    
    
    (4,491
    )2012
    
    
    10,000
    
    
    
    (5,697
    )
    
    
    14,160
    
    
    
    (10,742
    )2013
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    (12,002
    )2014
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    (11,554
    )2016
    
    
    
    
    
    
    
    
    
    
    8,494
    
    
    
    (8,033
    )Total
    
    $
    40,000
    
    
    $
    (28,364
    )
    
    $
    67,654
    
    
    $
    (53,419
    )Credit Swaps Purchased-Single
NameYear of Maturity2014
    
    $
    (11,740
    )
    
    $
    3,546
    
    
    $
    (11,740
    )
    
    $
    2,699Total
    
    $
    (11,740
    )
    
    $
    3,546
    
    
    $
    (11,740
    )
    
    $
    2,699
  21




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##### Table of Contents



5. Financial Instruments and Fair Value Disclosures
    
    
    Level 1  Valuations based on unadjusted quoted prices in active markets for identical
assets of liabilities.
  
    
    Level 2  Valuations based on quoted prices in markets that are not considered to be
active; or valuations for which all significant inputs are observable or can be
corroborated by observable market data, either directly or indirectly.
  
    
    Level 3  Valuations in which a significant input or inputs are unobservable and that
are supported by little or no market activity.
   22




---



##### Table of Contents



Nonperformance Risk Adjustment
    Quoted Pricesin
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significant
    
    
    Assets /for
    
    
    Observable
    
    
    Unobservable
    
    
    LiabilitiesIdentical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    at Fair(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    ValueAssetsCash and cash equivalents
    
    $
    604,856
    
    
    $
    
    
    
    $
    
    
    
    $
    604,856Available-for-sale investments
    
    
    
    
    
    
    133,792
    
    
    
    
    
    
    
    133,792Trading account assets
    
    
    
    
    
    
    
    
    
    
    263
    
    
    
    263Other assets
    
    
    
    
    
    
    2,577
    
    
    
    
    
    
    
    2,577Total Assets
    
    $
    604,856
    
    
    $
    136,369
    
    
    $
    263
    
    
    $
    741,488LiabilitiesUnrealized loss on credit swaps
    
    $
    
    
    
    $
    
    
    
    $
    1,497,947
    
    
    $
    1,497,947Total Liabilities
    
    $
    
    
    
    $
    
    
    
    $
    1,497,947
    
    
    $
    1,497,947
  23




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##### Table of Contents



Quoted Pricesin
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significantfor
    
    
    Observable
    
    
    Unobservable
    
    
    Assets /Identical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    Liabilities(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    at Fair ValueAssetsCash and cash equivalents
    
    $
    243,909
    
    
    $
    37,003
    
    
    $
    
    
    
    $
    280,912Available-for-sale investments
    
    
    
    
    
    
    482,134
    
    
    
    796
    
    
    
    482,930Trading account assets
    
    
    
    
    
    
    
    
    
    
    3,940
    
    
    
    3,940Other assets
    
    
    
    
    
    
    7,813
    
    
    
    
    
    
    
    7,813Total Assets
    
    $
    243,909
    
    
    $
    526,950
    
    
    $
    4,736
    
    
    $
    775,595LiabilitiesUnrealized loss on credit swaps
    
    $
    
    
    
    $
    
    
    
    $
    2,173,461
    
    
    $
    2,173,461Total Liabilities
    
    $
    
    
    
    $
    
    
    
    $
    2,173,461
    
    
    $
    2,173,461
  Three Months Ended
    
    
    Three Months EndedJune 30, 2009
    
    
    June 30, 2008Trading
    
    
    Available-for-
    
    
    Available-for-Account
    
    
    Sale
    
    
    SaleAssets
    
    
    Investments
    
    
    InvestmentsBalance, beginning of period
    
    $
    3,830
    
    
    $
    365
    
    
    $
    7,021Realized gains (losses)
    
    
    2,488
    
    
    
    (194
    )
    
    
    Unrealized gains (losses)
    
    
    88
    
    
    
    (171
    )
    
    
    (239
    )Purchases, sales, issuances and settlements
    
    
    (6,143
    )
    
    
    
    
    
    
    Balance, end of period
    
    $
    263
    
    
    $
    
    
    
    $
    6,782
  Six Months Ended
    
    
    Six Months EndedJune 30, 2009
    
    
    June 30, 2008Trading
    
    
    Available-for-
    
    
    Available-for-Account
    
    
    Sale
    
    
    SaleAssets
    
    
    Investments
    
    
    InvestmentsBalance, beginning of period
    
    $
    3,940
    
    
    $
    796
    
    
    $
    9,657Realized losses
    
    
    2,378
    
    
    
    (808
    )
    
    
    Unrealized gains (losses)
    
    
    88
    
    
    
    
    
    
    
    (2,999
    )Purchases, sales, issuances and settlements
    
    
    (6,143
    )
    
    
    12
    
    
    
    124Balance, end of period
    
    $
    263
    
    
    $
    
    
    
    $
    6,782
  24




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,Unrealized Loss on Credit Swaps
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Balance, beginning of period
    
    $
    (2,050,571
    )
    
    $
    (713,613
    )
    
    $
    (2,173,461
    )
    
    $
    (368,739
    )Net realized losses
    
    
    2,975
    
    
    
    
    
    
    
    37,453
    
    
    
    4,876Unrealized gains (losses)
    
    
    549,649
    
    
    
    167,385
    
    
    
    638,061
    
    
    
    (182,365
    )Balance, beginning of period
    
    $
    (1,497,947
    )
    
    $
    (546,228
    )
    
    $
    (1,497,947
    )
    
    $
    (546,228
    )
   Financial Instruments Not Measured at Fair Value
   25




---



##### Table of Contents



Fair Value Option
  6. Credit Events and Terminations of Credit Swaps
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Realized losses on single name credit swaps
    
    $
    
    
    
    $
    (898
    )
    
    $
    (9,850
    )
    
    $
    (900
    )Realized losses on CDS on ABS
    
    
    (3,000
    )
    
    
    
    
    
    
    (27,628
    )
    
    
    (4,875
    )Total realized losses
    
    $
    (3,000
    )
    
    $
    (898
    )
    
    $
    (37,478
    )
    
    $
    (5,775
    )
 Credit Swaps Sold Single Name
  CDS on ABS
     26




---



##### Table of Contents



7. Counterparty Default  LBSF
  8. Variable Interest Entities
 Consolidation of Variable Interest Entities .
    27




---



##### Table of Contents



9. Earnings (Loss) per Share
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net earnings (loss)
available to common shares
    
    $
    596,928
    
    
    $
    262,603
    
    
    $
    703,736
    
    
    $
    (407,475
    )Weighted-average basic shares
outstanding
    
    
    40,430
    
    
    
    45,225
    
    
    
    40,646
    
    
    
    45,166Effect of dilutive instruments:Share options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted share units
    
    
    838
    
    
    
    181
    
    
    
    450
    
    
    
    Dilutive potential shares
    
    
    838
    
    
    
    181
    
    
    
    450
    
    
    
    Weighted-average diluted shares
    
    
    41,268
    
    
    
    45,406
    
    
    
    41,096
    
    
    
    45,166Basic EPS
    
    $
    14.76
    
    
    $
    5.81
    
    
    $
    17.31
    
    
    $
    (9.02
    )Diluted EPS
    
    $
    14.46
    
    
    $
    5.78
    
    
    $
    17.12
    
    
    $
    (9.02
    )
    28




---



##### Table of Contents



10. Share Based Compensation
 Share-Based Payment
     11.
    
    Comprehensive Income (Loss)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss)
    
    $
    597,998
    
    
    $
    264,545
    
    
    $
    705,750
    
    
    $
    (403,728
    )Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    193
    
    
    
    (15
    )
    
    
    117
    
    
    
    (61
    )Change in net unrealized gains (losses) on
available-for-sale investments
    
    
    989
    
    
    
    (1,103
    )
    
    
    (1,407
    )
    
    
    (2,379
    )Comprehensive income (loss)
    
    
    599,180
    
    
    
    263,427
    
    
    
    704,460
    
    
    
    (406,168
    )Distributions on preferred securities of subsidiary
    
    
    1,070
    
    
    
    1,942
    
    
    
    2,014
    
    
    
    3,747Comprehensive income (loss) available to common
shares
    
    $
    598,110
    
    
    $
    261,485
    
    
    $
    702,446
    
    
    $
    (409,915
    )
  29




---



##### Table of Contents



12. Subsequent Events
     30




---



##### Table of Contents



Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following is a discussion and analysis of our financial condition and results of
operations. This discussion should be read in conjunction with the condensed consolidated
financial statements, including the notes thereto, included elsewhere in this Quarterly Report and
our consolidated financial statements and accompanying notes which appear in the Companys 2008
Annual Report on Form 10-K . It contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those discussed below and in
the Companys 2008 Annual Report on Form 10-K , particularly under Item 1A Risk Factors and the
heading Cautionary Note Regarding Forward-Looking Statements. Capitalized terms used but not
defined in this discussion are as defined elsewhere in this Quarterly Report.
 Business
  Primus Financial
      31




---



##### Table of Contents



Primus Asset Management
   PRS Trading / Harrier
   Trends and Business Outlook
   32




---



##### Table of Contents




    
    Additional write-downs and sales of distressed credit assets;
 
    
    Further consolidation of major banks and credit swap dealers;
 
    
    Increased credit default swap market regulation; and
 
    
    One or more credit default swap clearinghouses.
   
    
    Amortizing Primus Financials credit swap portfolio;
 
    
    Pursuing new opportunities in credit, structured credit and derivative markets;
 
    
    Efficiently allocating capital; and
 
    
    Aligning costs with our business approach.
     33




---



##### Table of Contents



Critical Accounting Policies
  Counterparty Default  LBSF
    34




---



##### Table of Contents



Results of Operations
 Introduction
    Three Months Ended June 30, 2009 Compared With Three Months Ended June 30, 2008
 Overview of Financial Results
        35




---



##### Table of Contents



Net Credit Swap Revenue (Loss)
   
    
    Net premiums earned;
 
    
    Net realized gains (losses) on credit swaps, which include gain (losses) on terminated
credit swaps sold and losses on credit events during the period; and
 
    
    Net unrealized gains (losses) on credit swaps
  Three Months EndedJune 30,2009
    
    
    2008Net premiums earned
    
    $
    22,234
    
    
    $
    27,239Net realized losses on credit swaps
    
    
    (2,975
    )
    
    
    (898
    )Net unrealized gains on credit swaps
    
    
    552,624
    
    
    
    244,649Total net credit swap revenue
    
    $
    571,883
    
    
    $
    270,990
 Net Premiums Earned  Primus Financial
  
    
    Premium income on single name credit swaps sold;
 
    
    Premium income on tranches sold;
 
    
    Premium income on CDS on ABS; and
 
    
    Net premium income (expense) on credit swaps undertaken to offset credit risk.
  36




---



##### Table of Contents



Three Months EndedJune 30,2009
    
    
    2008Premium income on single name credit swaps sold
    
    $
    16,984
    
    
    $
    21,809Premium income on tranches sold
    
    
    5,144
    
    
    
    5,147Premium income on CDS on ABS
    
    
    94
    
    
    
    273Net premium income (expense) on credit swaps
undertaken to offset credit risk
    
    
    12
    
    
    
    10Total net premiums earned
    
    $
    22,234
    
    
    $
    27,239
    Net Realized Gains (Losses) on Credit Swaps  Primus Financial
  Three Months EndedJune 30,2009
    
    
    2008Realized gains on single name credit swaps
    
    $
    25
    
    
    $
    Realized losses on CDS on ABS
    
    
    (3,000
    )
    
    
    Realized losses on terminated single name
credit swaps sold
    
    
    
    
    
    
    (898
    )Total net realized losses on credit swaps
    
    $
    (2,975
    )
    
    $
    (898
    )
   37




---



##### Table of Contents



Net Unrealized Gains (Losses) on Credit Swaps  Primus Financial
  Three Months EndedJune 30,2009
    
    
    2008Net unrealized gains on credit swaps sold
    
    $
    266,227
    
    
    $
    76,873Net unrealized gains on tranches sold
    
    
    289,816
    
    
    
    172,416Net unrealized losses on CDS on ABS
    
    
    (2,680
    )
    
    
    (5,030
    )Net unrealized gains (losses) on credit
swaps undertaken to offset credit risk
    
    
    (739
    )
    
    
    390Total net unrealized gains on credit swaps
    
    $
    552,624
    
    
    $
    244,649
  Asset Management and Advisory Fees
    Interest Income
    38




---



##### Table of Contents



Three Months EndedJune 30,2009
    
    
    2008Interest income
    
    $
    1,125
    
    
    $
    6,319Cash and cash equivalents
    
    $
    604,856
    
    
    $
    303,858Available-for-sale securities
    
    
    133,792
    
    
    
    589,203Total cash, cash equivalents and
available-for-sale securities
    
    $
    738,648
    
    
    $
    893,061
 Gain on Retirement of Long-Term Debt
     Impairment Losses on Available-for-Sale Investments
  Other
    39




---



##### Table of Contents



Operating Expenses
  Three Months EndedJune 30,2009
    
    
    2008Compensation and employee benefits
    
    $
    4,566
    
    
    $
    5,964Professional and legal fees
    
    
    1,957
    
    
    
    1,281Depreciation and amortization
    
    
    251
    
    
    
    334Technology and data
    
    
    732
    
    
    
    900Other
    
    
    1,163
    
    
    
    1,300Total operating expenses
    
    $
    8,669
    
    
    $
    9,779Number of full-time employees, at end of period
    
    
    37
    
    
    
    50
      40




---



##### Table of Contents



Interest Expense and Preferred Distributions
     Income Taxes
   41




---



##### Table of Contents



Six Months Ended June 30, 2009 Compared With Six Months Ended June 30, 2008
 Overview of Financial Results
  Net Credit Swap Revenue (Loss)
   Six Months EndedJune 30,2009
    
    
    2008Primus Financial
    
    $
    682,764
    
    
    $
    (393,337
    )PRS Trading/Harrier
    
    
    
    
    
    
    712Total consolidated net credit swap revenue (loss)
    
    $
    682,764
    
    
    $
    (392,625
    )
   Net Credit Swap Revenue (Loss)  Primus Financial
   
    
    Net premiums earned;
 
    
    Net realized gains (losses) on credit swaps, which include gain (losses) on terminated
credit swaps sold and losses on credit events during the period; and
 
    
    Net unrealized gains (losses) on credit swaps.
  42




---



##### Table of Contents



Six Months EndedJune 30,2009
    
    
    2008Net premiums earned
    
    $
    44,703
    
    
    $
    54,534Net realized losses on credit swaps
    
    
    (37,453
    )
    
    
    (5,747
    )Net unrealized gains (losses) on credit swaps
    
    
    675,514
    
    
    
    (442,124
    )Total net credit swap revenue (loss)
    
    $
    682,764
    
    
    $
    (393,337
    )
 Net Premiums Earned  Primus Financial
  
    
    Premium income on single name credit swaps sold;
 
    
    Premium income on tranches sold;
 
    
    Premium income on CDS on ABS; and
 
    
    Net premium income (expense) on credit swaps undertaken to offset credit risk.
  Six Months EndedJune 30,2009
    
    
    2008Premium income on single name credit swaps sold
    
    $
    34,217
    
    
    $
    43,693Premium income on tranches sold
    
    
    10,231
    
    
    
    10,270Premium income on CDS on ABS
    
    
    231
    
    
    
    553Net premium income (expense) on credit swaps
undertaken to offset credit risk
    
    
    24
    
    
    
    18Total net premiums earned
    
    $
    44,703
    
    
    $
    54,534
     43




---



##### Table of Contents



Net Realized Gains (Losses) on Credit Swaps  Primus Financial
  Six Months EndedJune 30,2009
    
    
    2008Realized gains on terminated single name
credit swaps sold
    
    $
    
    
    
    $
    24Realized gains on single name credit swaps
    
    
    25
    
    
    
    Realized losses on single name credit swaps
    
    
    (9,850
    )
    
    
    Realized losses on CDS on ABS
    
    
    (27,628
    )
    
    
    (5,773
    )Realized losses on terminated single name
credit swaps sold
    
    
    
    
    
    
    (2
    )Net realized gains on terminated credit
swaps undertaken to offset credit risk
    
    
    
    
    
    
    4Total net realized losses on credit swaps
    
    $
    (37,453
    )
    
    $
    (5,747
    )
  Net Unrealized Gains (Losses) on Credit Swaps  Primus Financial
  Six Months EndedJune 30,2009
    
    
    2008Net unrealized gains (losses) on credit swaps sold
    
    $
    316,683
    
    
    $
    (265,388
    )Net unrealized gains (losses) on tranches sold
    
    
    334,524
    
    
    
    (168,989
    )Net unrealized gains (losses) on CDS on ABS
    
    
    25,055
    
    
    
    (8,501
    )Net unrealized gains (losses) on credit swaps
undertaken to offset credit risk
    
    
    (748
    )
    
    
    754Total net unrealized gains (losses) on credit swaps
    
    $
    675,514
    
    
    $
    (442,124
    )
   44




---



##### Table of Contents



Asset Management and Advisory Fees
    Interest Income
    Six Months EndedJune 30,2009
    
    
    2008Interest income
    
    $
    3,498
    
    
    $
    15,513Cash and cash equivalents
    
    $
    604,856
    
    
    $
    303,858Available-for-sale securities
    
    
    133,792
    
    
    
    589,203Total cash, cash equivalents and
available-for-sale securities
    
    $
    738,648
    
    
    $
    893,061
  45




---



##### Table of Contents



Gain on Retirement of Long-Term Debt
    Impairment Losses on Available-for-Sale Investments
  Other
    46




---



##### Table of Contents



Operating Expenses
  Six Months EndedJune 30,2009
    
    
    2008Compensation and employee benefits
    
    $
    9,281
    
    
    $
    12,155Professional and legal fees
    
    
    3,378
    
    
    
    2,304Depreciation and amortization
    
    
    509
    
    
    
    663Technology and data
    
    
    1,550
    
    
    
    2,011Other
    
    
    2,046
    
    
    
    2,623Total operating expenses
    
    $
    16,764
    
    
    $
    19,756Number of full-time employees, at end of period
    
    
    37
    
    
    
    50
     Interest Expense and Preferred Distributions
    47




---



##### Table of Contents



Income Taxes
  Income Taxes
   48




---



##### Table of Contents



Non-GAAP Financial Measures  Economic Results
   
    
    Unrealized gains (losses) on credit swaps sold by Primus Financial are excluded from
GAAP net income (loss) available to common shares;
 
    
    Realized gains from early termination of credit swaps sold by Primus Financial are
excluded from GAAP net income (loss) available to common shares;
 
    
    Realized gains from early termination of credit swaps sold by Primus Financial are
amortized over the period that would have been the remaining life of the credit swap, and
that amortization is added to GAAP net income (loss) available to common shares; and
 
    
    Provision for CDS on ABS credit events; and
 
    
    Reduction in provision for CDS on ABS credit events upon termination of credit swaps.
   49




---



##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008GAAP net income (loss) available to common
shares
    
    $
    596,928
    
    
    $
    262,603
    
    
    $
    703,736
    
    
    $
    (407,475
    )Adjustments:Less: Change in unrealized fair value of credit
swaps sold (gain) loss by Primus Financial
    
    
    (552,624
    )
    
    
    (244,649
    )
    
    
    (675,514
    )
    
    
    442,124Less: Realized gains from early termination
of credit swaps sold by Primus Financial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24
    )Add: Amortization of realized gains from
the early termination of credit swap sold by
Primus Financial
    
    
    368
    
    
    
    548
    
    
    
    761
    
    
    
    1,280Less: Provision for CDS on ABS credit events
    
    
    (188
    )
    
    
    
    
    
    
    (15,242
    )
    
    
    (189
    )Add: Reduction in provision for CDS on ABS
credit events upon termination of credit swaps
    
    
    3,000
    
    
    
    
    
    
    
    27,628
    
    
    
    4,875Net Economic Results
    
    $
    47,484
    
    
    $
    18,502
    
    
    $
    41,369
    
    
    $
    40,591Economic Results earnings per diluted share
    
    $
    1.15
    
    
    $
    0.41
    
    
    $
    1.01
    
    
    $
    0.90Economic Results weighted average common
shares outstanding  diluted
    
    
    41,268
    
    
    
    45,406
    
    
    
    41,096
    
    
    
    45,219
  Off-Balance Sheet Arrangements
  Contractual Obligations
  Payment due by periodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsProperty leases
    
    $
    8,624
    
    
    $
    1,282
    
    
    $
    2,565
    
    
    $
    2,248
    
    
    $
    2,5297% Senior Notes
    
    
    95,917
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    95,917Interest on 7% Senior Notes (b)
    
    
    174,457
    
    
    
    2,651
    
    
    
    7,383
    
    
    
    13,428
    
    
    
    150,995Subordinated deferrable interest
notes
    
    
    155,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    155,400Interest on subordinated
deferrable interest notes (a)
    
    
    85,498
    
    
    
    5,466
    
    
    
    10,948
    
    
    
    10,933
    
    
    
    58,151Total
    
    $
    519,896
    
    
    $
    9,399
    
    
    $
    20,896
    
    
    $
    26,609
    
    
    $
    462,992
 (a)
    
    Future payments for interest on our subordinated deferrable interest notes will be
determined by future LIBOR rates, to which a predetermined contractual spread is added, as
previously discussed. For the purpose of this table, estimated future LIBOR rates were based on the
last rate set during the second quarter of 2009.(b)
    
    Net interest payments on the outstanding $95.9 million, 7% Senior Notes at June 30, 2009 are
adjusted by the interest rate swap agreement, which converts a portion of the interest payment on
the 7% Senior Notes from a fixed to a floating basis, as previously discussed. Future payments of
interest on the interest rate swap will be determined by future LIBOR rates, to which a
predetermined contractual rate is added. For the purpose of this table, estimated future LIBOR
rates were based on the last rate set during the second quarter of 2009. The counterparty has the
right to terminate the interest rate swap agreement in 2011, and for the purpose of this table, the
interest rate swap is assumed to be terminated at that date.  50




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Property leases:
  Liquidity and Capital Resources
 Capital Strategy
     51




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Cash Flows
 Cash flows from operating activities 
 Cash flows from investing activities 
 Cash flows from financing activities 
   52




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Cautionary Note Regarding Forward-Looking Statements
  
    
    fluctuations in the economic, credit, interest rate or foreign
currency environment in the United States and abroad;
    
    the level of activity within the national and international credit markets;
    
    the level of activity in the leveraged buyout and private equity markets;
    
    competitive conditions and pricing levels;
    
    change in rating agency requirements or methodology;
    
    counterparty limits and risk;
    
    legislative and regulatory developments;
    
    technological developments;
    
    changes in tax laws;
    
    changes in international or national political or economic conditions,
including any terrorist attacks;
    
    successful implementation of our 2009 Business Outlook and Strategy
and our ability to effectively integrate and manage the CypressTree
acquisition; and
    
    uncertainties that have not been identified at this time.
  53




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Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
     54




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Item 4.
    
    Controls and Procedures
    55




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##### Table of Contents



Part II. Other Information
 
 Item 1.
    
    Legal Proceedings
  
 Item 1A.
    
    Risk Factors
  
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
 Issuer Purchases of Equity Securities
  Total Number of
    
    
    Approximate DollarTotal
    
    
    
    
    
    
    Shares Purchased
    
    
    Value of Shares thatNumber of
    
    
    Average
    
    
    as Part of Publicly
    
    
    May Yet Be PurchasedShares
    
    
    Price Paid
    
    
    Announced Plans
    
    
    under the Plans orPeriod
    
    Purchased
    
    
    per Share
    
    
    or Programs
    
    
    Programs (a)April 1
 30
    
    
    269,732
    
    
    $
    1.85
    
    
    
    269,732
    
    
    $
    20,081,962May 1  31
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    20,081,962June 1  3047,500
    
    
    $
    2.33
    
    
    
    47,500
    
    
    $
    19,971,287Total
    
    
    317,232
    
    
    $
    1.92
    
    
    
    317,232
 (a)
    
    On October 8, 2008, our board of directors authorized the implementation of a buyback
program for the purchase of our common shares and/or the 7% Senior Notes in the aggregate up to
$25.0 million. The amounts in this column do not reflect the cost of approximately $10.9 million
for purchases of our 7% Senior Notes, since inception of our buyback program through the quarter
ended June 30, 2009. 
 Item 4.
    
    Submission of Matters to a Vote of Security Holders
   Nominee directors:
    
    For
    
    
    WithheldFrank P. Filipps
    
    
    35,120,789
    
    
    
    778,869Thomas J. Hartlage
    
    
    35,732,548
    
    
    
    167,110
  56




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(2)
    
    The re-appointment of Ernst & Young LLP as the Companys independent auditors for the
fiscal year ending December 31, 2009 and to authorize the Audit Committee of the Board of Directors
to set the auditors remuneration. For
    
    
    35,830,440Against
    
    
    56,787Abstain
    
    
    12,431
 
 Item 6.
    
    Exhibits
 Exhibits:4.1
    
    
    Rights Agreement dated as of May 29, 2009, between Primus Guaranty, Ltd. and Mellon Investor
Services LLC (Incorporated by reference to Exhibit 4.1 to Form 8-K filed on May 29, 2009).12
    
    
    Ratio of Earnings to Combined Fixed Charges and Preferred Share Dividend Requirements31.1
    
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
200231.2
    
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
200232
    
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
 
  57




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SIGNATURES
  PRIMUS GUARANTY, LTD./s/ Richard ClaidenRichard ClaidenChief Financial and Operating Officer
(Duly Authorized Officer and Principal Financial  Officer)   58




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo
    
    Description4.1
    
    
    Rights Agreement dated as of May 29, 2009, between Primus Guaranty, Ltd. and Mellon Investor
Services LLC (Incorporated by reference to Exhibit 4.1 to Form 8-K filed on May 29, 2009).12
    
    
    Ratio of Earnings to Combined Fixed Charges and Preferred Share Dividend Requirements31.1
    
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
200231.2
    
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
200232
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
  59