##### 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, 2010
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to .
 Commission File Number: 001-32307
 
 Primus Guaranty, Ltd.
  Bermuda
    
    98-0402357(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 Clarendon House
2 Church Street
Hamilton HM 11, Bermuda
 441-296-0519
 Yes þ No o
 Yes o No o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 Yes o No þ




---



##### 



Primus Guaranty, Ltd.
 Form 10-Q
  INDEX
 Part I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Statements of Financial Condition (Unaudited) as of June 30, 2010 and December 31, 2009
    
    
    3Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended June 30, 2010 and 2009
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2010 and 2009
    
    
    5Condensed Consolidated Statements of Equity (Deficit) (Unaudited) for the six months ended June 30, 2010 and year ended December 31, 2009
    
    
    6Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    31Cautionary Statement Regarding Forward Looking Information
    
    
    54Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    55Item 4. Controls and Procedures
    
    
    56Part II. Other InformationItem 1. Legal Proceedings
    
    
    56Item 1A. Risk Factors
    
    
    56Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    57Item 6. Exhibits
    
    
    57Signatures
    
    
    58Exhibit 12Exhibit 31.1Exhibit 31.2Exhibit 32
   2




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##### Table of Contents



Part I. Financial Information
 
  Primus Guaranty, Ltd.
 
 Condensed Consolidated Statements of Financial Condition 
(Unaudited)
 (in thousands except share amounts)
 June 30,
    
    
    December 31,2010
    
    
    2009AssetsCash and cash equivalents
    
    $
    139,863
    
    
    $
    299,514Investments (includes $368,314 and $274,275 at fair value)
    
    
    368,484
    
    
    
    274,444Restricted cash and investments
    
    
    129,734
    
    
    
    127,116CLO cash and cash equivalents
    
    
    117,357
    
    
    
    CLO loans and securities, at fair value
    
    
    2,422,961
    
    
    
    CLO other assets
    
    
    56,095
    
    
    
    Accrued interest and premiums
    
    
    6,815
    
    
    
    6,163Unrealized gain on credit swaps, at fair value
    
    
    126
    
    
    
    2,207Goodwill and other intangible assets, net
    
    
    7,712
    
    
    
    8,017Other assets
    
    
    13,488
    
    
    
    15,286Total assets
    
    $
    3,262,635
    
    
    $
    732,747Liabilities and Equity (deficit)LiabilitiesAccounts payable and accrued expenses
    
    $
    4,596
    
    
    $
    7,855Unrealized loss on credit swaps, at fair value
    
    
    757,537
    
    
    
    691,905Payable for credit events
    
    
    4,632
    
    
    
    28,596CLO notes, at fair value
    
    
    2,266,583
    
    
    
    CLO other liabilities
    
    
    87,968
    
    
    
    Long-term debt
    
    
    226,305
    
    
    
    244,051Other liabilities
    
    
    34,467
    
    
    
    9,787Total liabilities
    
    
    3,382,088
    
    
    
    982,194Commitments and contingenciesEquity (deficit)Common shares, $0.08 par value, 62,500,000 shares authorized,
38,580,653 and 38,267,546 shares issued and outstanding at
June 30, 2010 and December 31, 2009
    
    
    3,086
    
    
    
    3,061Additional paid-in capital
    
    
    280,851
    
    
    
    280,685Accumulated other comprehensive income
    
    
    3,818
    
    
    
    2,148Retained earnings (deficit)
    
    
    (729,428
    )
    
    
    (628,443
    )Appropriated retained earnings from CLO consolidation
    
    
    229,118
    
    
    
    Total shareholders equity (deficit) of Primus Guaranty, Ltd.
    
    
    (212,555
    )
    
    
    (342,549
    )Preferred securities of subsidiary
    
    
    93,102
    
    
    
    93,102Total equity (deficit)
    
    
    (119,453
    )
    
    
    (249,447
    )Total liabilities and equity (deficit)
    
    $
    3,262,635
    
    
    $
    732,747
 See accompanying notes.
  3




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##### Table of Contents



Primus Guaranty, Ltd.
 
 Condensed Consolidated Statements of Operations
(Unaudited)
 (in thousands except per share amounts)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009RevenuesNet credit swap revenue (loss)
    
    $
    (189,708
    )
    
    $
    571,883
    
    
    $
    (102,178
    )
    
    $
    682,764Net CLO loss
    
    
    (124,842
    )
    
    
    
    
    
    
    (47,249
    )
    
    
    CLO interest income
    
    
    19,510
    
    
    
    
    
    
    
    42,932
    
    
    
    Asset management and advisory fees
    
    
    263
    
    
    
    387
    
    
    
    554
    
    
    
    806Interest income
    
    
    3,541
    
    
    
    1,125
    
    
    
    6,241
    
    
    
    3,498Gain on retirement of long-term debt
    
    
    2,676
    
    
    
    33,189
    
    
    
    7,433
    
    
    
    38,948Impairment loss on investments
    
    
    
    
    
    
    (152
    )
    
    
    
    
    
    
    (761
    )Other income (loss)
    
    
    (223
    )
    
    
    2,550
    
    
    
    (154
    )
    
    
    2,474Total revenues (losses)
    
    
    (288,783
    )
    
    
    608,982
    
    
    
    (92,421
    )
    
    
    727,729ExpensesCLO interest expense
    
    
    8,258
    
    
    
    
    
    
    
    14,095
    
    
    
    CLO other expenses
    
    
    2,302
    
    
    
    
    
    
    
    3,292
    
    
    
    Compensation and employee benefits
    
    
    5,766
    
    
    
    4,566
    
    
    
    11,191
    
    
    
    9,281Professional and legal fees
    
    
    2,308
    
    
    
    1,957
    
    
    
    3,947
    
    
    
    3,378Interest expense
    
    
    1,737
    
    
    
    2,310
    
    
    
    3,606
    
    
    
    5,068Other
    
    
    4,590
    
    
    
    2,146
    
    
    
    8,126
    
    
    
    4,105Total expenses
    
    
    24,961
    
    
    
    10,979
    
    
    
    44,257
    
    
    
    21,832Income (loss) before provision for
income taxes
    
    
    (313,744
    )
    
    
    598,003
    
    
    
    (136,678
    )
    
    
    705,897Provision (benefit) for income taxes
    
    
    (140
    )
    
    
    5
    
    
    
    3
    
    
    
    147Net income (loss)
    
    
    (313,604
    )
    
    
    597,998
    
    
    
    (136,681
    )
    
    
    705,750Distributions on preferred
securities of subsidiary
    
    
    724
    
    
    
    1,070
    
    
    
    1,712
    
    
    
    2,014Less: Net loss attributable to
non-parent interests in CLOs
    
    
    (125,934
    )
    
    
    
    
    
    
    (36,521
    )
    
    
    Net income (loss) available to
common shares
    
    $
    (188,394
    )
    
    $
    596,928
    
    
    $
    (101,872
    )
    
    $
    703,736Income (loss) per common share:Basic
    
    $
    (4.84
    )
    
    $
    14.76
    
    
    $
    (2.63
    )
    
    $
    17.31Diluted
    
    $
    (4.84
    )
    
    $
    14.46
    
    
    $
    (2.63
    )
    
    $
    17.12Average common shares outstanding:Basic
    
    
    38,903
    
    
    
    40,430
    
    
    
    38,795
    
    
    
    40,646Diluted
    
    
    38,903
    
    
    
    41,268
    
    
    
    38,795
    
    
    
    41,096
 See accompanying notes.
  4




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##### Table of Contents



Primus Guaranty, Ltd.
 
 Condensed Consolidated Statements of Cash Flows
(Unaudited)
 (in thousands)
 Six Months EndedJune 30,2010
    
    
    2009Cash flows from operating activitiesNet income (loss) available to common shares
    
    $
    (101,872
    )
    
    $
    703,736Net loss attributable to non-parent interests in CLOs
    
    
    (36,521
    )
    
    
    Distributions on preferred securities of subsidiary
    
    
    1,712
    
    
    
    2,014Net income (loss)
    
    
    (136,681
    )
    
    
    705,750Adjustments to reconcile net income (loss) to net cash used
in operating activities:Non-cash items included in net income (loss):Net unrealized losses on CLO loans and securities
    
    
    6,366
    
    
    
    Net unrealized losses on CLO notes
    
    
    92,558
    
    
    
    Net realized gains by the CLOs
    
    
    (42,580
    )
    
    
    Net unrealized (gains) losses on credit swaps
    
    
    67,712
    
    
    
    (675,514
    )Gain on retirement of long-term debt
    
    
    (7,433
    )
    
    
    (38,948
    )Impairment loss on available-for-sale investments
    
    
    
    
    
    
    761Other
    
    
    2,336
    
    
    
    2,612Increase (decrease) in cash resulting from changes in:CLO cash and cash equivalents
    
    
    (25,219
    )
    
    
    CLO other assets
    
    
    (16,261
    )
    
    
    CLO other liabilities
    
    
    46,444
    
    
    
    Restricted cash
    
    
    (1,992
    )
    
    
    Accrued interest and premiums
    
    
    (652
    )
    
    
    3,263Other assets
    
    
    (446
    )
    
    
    (632
    )Trading account assets
    
    
    (53,346
    )
    
    
    3,677Accounts payable and accrued expenses
    
    
    (3,260
    )
    
    
    287Payable for credit events
    
    
    (23,964
    )
    
    
    (1,146
    )Other liabilities
    
    
    24,680
    
    
    
    (318
    )Net cash used in operating activities
    
    
    (71,738
    )
    
    
    (208
    )Cash flows from investing activitiesProceeds from sale of CLO loans and securities
    
    
    525,125
    
    
    
    Purchases of CLO loans and securities
    
    
    (514,785
    )
    
    
    Fixed asset purchases
    
    
    (23
    )
    
    
    (56
    )Payments received from CLO investments
    
    
    
    
    
    
    94Purchases of available-for-sale investments
    
    
    (122,569
    )
    
    
    (20,566
    )Maturities and sales of available-for-sale investments
    
    
    77,021
    
    
    
    367,796Net cash provided by (used in) investing activities
    
    
    (35,231
    )
    
    
    347,268Cash flows from financing activitiesRepayment of CLO notes by the CLOs
    
    
    (35,127
    )
    
    
    Retirement of long-term debt
    
    
    (12,500
    )
    
    
    (18,435
    )Purchase, retirement and issuance of common shares
    
    
    (3,269
    )
    
    
    (1,876
    )Purchase of preferred securities from subsidiary
    
    
    
    
    
    
    (908
    )Net preferred distributions of subsidiary
    
    
    (1,712
    )
    
    
    (2,014
    )Net cash used in financing activities
    
    
    (52,608
    )
    
    
    (23,233
    )Net effect of exchange rate changes on cash
    
    
    (74
    )
    
    
    117Net increase (decrease) in cash
    
    
    (159,651
    )
    
    
    323,944Cash and cash equivalents at beginning of period
    
    
    299,514
    
    
    
    280,912Cash and cash equivalents at end of period
    
    $
    139,863
    
    
    $
    604,856Supplemental disclosuresCash paid for interest
    
    $
    3,679
    
    
    $
    5,387Cash paid for taxes
    
    $
    41
    
    
    $
    11
 See accompanying notes.
  5




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##### Table of Contents



Primus Guaranty, Ltd.
 
 Condensed Consolidated Statements of Equity (Deficit)
(Unaudited)
 (in thousands)
 Six Months Ended
    
    
    Year EndedJune 30, 2010
    
    
    December 31, 2009Common sharesBalance at beginning of period
    
    $
    3,061
    
    
    $
    3,263Common shares purchased and retired
    
    
    (48
    )
    
    
    (275
    )Shares issued under employee compensation plans
    
    
    73
    
    
    
    73Balance at end of period
    
    
    3,086
    
    
    
    3,061Additional paid-in capitalBalance at beginning of period
    
    
    280,685
    
    
    
    281,596Common shares purchased and retired
    
    
    (3,294
    )
    
    
    (10,150
    )Shares vested under employee compensation plans
    
    
    3,460
    
    
    
    4,728Preferred shares purchased by subsidiary
    
    
    
    
    
    
    4,511Balance at end of period
    
    
    280,851
    
    
    
    280,685Accumulated other comprehensive income (loss)Balance at beginning of period
    
    
    2,148
    
    
    
    908Adoption of ASC Topic 810, Consolidation
    
    
    (1,061
    )
    
    
    Foreign currency translation adjustments
    
    
    (74
    )
    
    
    232Change in unrealized holding gains on
available-for-sale securities
    
    
    2,805
    
    
    
    1,008Balance at end of period
    
    
    3,818
    
    
    
    2,148Retained earnings (deficit)Balance at beginning of period
    
    
    (628,443
    )
    
    
    (2,088,723
    )Adoption of ASC Topic 810, Consolidation
    
    
    887
    
    
    
    Net income (loss)
    
    
    (136,681
    )
    
    
    1,463,697Net loss attributable to non-parent interests in CLOs
    
    
    36,521
    
    
    
    Distributions on preferred securities of subsidiary
    
    
    (1,712
    )
    
    
    (3,417
    )Balance at end of period
    
    
    (729,428
    )
    
    
    (628,443
    )Appropriated retained earnings from CLO consolidationAdoption of ASC Topic 810, Consolidation
    
    
    265,639
    
    
    
    Net loss attributable to non-parent interests in CLOs
    
    
    (36,521
    )
    
    
    Balance at end of period
    
    
    229,118
    
    
    
    Total shareholders equity (deficit) of Primus
Guaranty, Ltd.
    
    
    (212,555
    )
    
    
    (342,549
    )Preferred securities of subsidiaryBalance at beginning of period
    
    
    93,102
    
    
    
    98,521Net purchase of preferred shares
    
    
    
    
    
    
    (5,419
    )Balance at end of period
    
    
    93,102
    
    
    
    93,102Total equity (deficit) at end of period
    
    $
    (119,453
    )
    
    $
    (249,447
    )
 See accompanying notes.
  6




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 3. Investments
  June 30, 2010Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAvailable-for-sale:Corporate debt securities
    
    $
    309,781
    
    
    $
    4,409
    
    
    $
    (419
    )
    
    $
    313,771ABS bonds
    
    
    1,265
    
    
    
    
    
    
    
    (68
    )
    
    
    1,197Total available-for-sale
    
    
    311,046
    
    
    
    4,409
    
    
    
    (487
    )
    
    
    314,968Trading:Corporate loans and debt securities
    
    
    53,535
    
    
    
    233
    
    
    
    (422
    )
    
    
    53,346Total trading
    
    
    53,535
    
    
    
    233
    
    
    
    (422
    )
    
    
    53,346Held-to-maturity:Certificate of deposit
    
    
    170
    
    
    
    
    
    
    
    
    
    
    
    170Total held-to-maturity
    
    
    170
    
    
    
    
    
    
    
    
    
    
    
    170Total investments
    
    $
    364,751
    
    
    $
    4,642
    
    
    $
    (909
    )
    
    $
    368,484
 December 31, 2009Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAvailable-for-sale:Corporate debt securities
    
    $
    271,809
    
    
    $
    1,784
    
    
    $
    (662
    )
    
    $
    272,931Investments in CLOs under management
    
    
    203
    
    
    
    1,062
    
    
    
    
    
    
    
    1,265ABS bonds
    
    
    84
    
    
    
    
    
    
    
    (5
    )
    
    
    79Total available-for-sale
    
    
    272,096
    
    
    
    2,846
    
    
    
    (667
    )
    
    
    274,275Held-to-maturity:Certificate of deposit
    
    
    169
    
    
    
    
    
    
    
    
    
    
    
    169Total held-to-maturity
    
    
    169
    
    
    
    
    
    
    
    
    
    
    
    169Total investments
    
    $
    272,265
    
    
    $
    2,846
    
    
    $
    (667
    )
    
    $
    274,444
    10




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
    June 30, 2010Securities with Unrealized LossesLess than 12 Months
    
    
    12 Months or More
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesCorporate debt securities
    
    $
    90,048
    
    
    $
    (356
    )
    
    $
    941
    
    
    $
    (63
    )
    
    $
    90,989
    
    
    $
    (419
    )ABS bonds
    
    
    1,197
    
    
    
    (68
    )
    
    
    
    
    
    
    
    
    
    
    1,197
    
    
    
    (68
    )Total
    
    $
    91,245
    
    
    $
    (424
    )
    
    $
    941
    
    
    $
    (63
    )
    
    $
    92,186
    
    
    $
    (487
    )
 December 31, 2009Securities with Unrealized LossesLess than 12 Months
    
    
    12 Months or More
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesCorporate debt securities
    
    $
    121,983
    
    
    $
    (405
    )
    
    $
    2,248
    
    
    $
    (257
    )
    
    $
    124,231
    
    
    $
    (662
    )ABS bonds
    
    
    79
    
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    79
    
    
    
    (5
    )Total
    
    $
    122,062
    
    
    $
    (410
    )
    
    $
    2,248
    
    
    $
    (257
    )
    
    $
    124,310
    
    
    $
    (667
    )
    11




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 4. Credit Swaps
 Net Credit Swap Revenue (Loss)
    Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net premiums earned
    
    $
    15,234
    
    
    $
    22,234
    
    
    $
    31,670
    
    
    $
    44,703Net realized losses on credit swaps
    
    
    (10,094
    )
    
    
    (2,975
    )
    
    
    (66,136
    )
    
    
    (37,453
    )Net unrealized gains (losses) on
credit swaps
    
    
    (194,848
    )
    
    
    552,624
    
    
    
    (67,712
    )
    
    
    675,514Total net credit swap revenue (loss)
    
    $
    (189,708
    )
    
    $
    571,883
    
    
    $
    (102,178
    )
    
    $
    682,764
 Credit Events and Terminations of Credit Swaps
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Realized losses on single
name credit swaps
    
    $
    (10,011
    )
    
    $
    
    
    
    $
    (29,234
    )
    
    $
    (9,850
    )Realized losses on tranches
    
    
    (83
    )
    
    
    
    
    
    
    (35,083
    )
    
    
    Realized losses on CDS on ABS
    
    
    
    
    
    
    (3,000
    )
    
    
    (1,819
    )
    
    
    (27,628
    )Total realized losses
    
    $
    (10,094
    )
    
    $
    (3,000
    )
    
    $
    (66,136
    )
    
    $
    (37,478
    )
  12




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 Single Name Credit Swaps
    Tranches
  CDS on ABS
   Counterparty Default  Lehman Brothers Special Financing Inc.
   13




---



##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 Credit Swap Portfolio Information
  June 30, 2010
    
    
    December 31, 2009Notional
    
    
    Fair
    
    
    Notional
    
    
    FairRating Category
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueBy Single Name Reference
Entity/TrancheCredit Swaps Sold-Single Name:AAA
    
    $
    221,714
    
    
    $
    (4,736
    )
    
    $
    347,963
    
    
    $
    (5,765
    )AA
    
    
    1,229,138
    
    
    
    (15,588
    )
    
    
    1,449,137
    
    
    
    (7,442
    )A
    
    
    4,193,127
    
    
    
    (30,695
    )
    
    
    5,656,180
    
    
    
    (11,217
    )BBB
    
    
    3,855,361
    
    
    
    (23,212
    )
    
    
    4,730,878
    
    
    
    (8,438
    )BB
    
    
    355,275
    
    
    
    (8,629
    )
    
    
    598,908
    
    
    
    (16,584
    )B
    
    
    76,119
    
    
    
    (4,759
    )
    
    
    189,284
    
    
    
    (2,726
    )CCC
    
    
    70,000
    
    
    
    (2,863
    )
    
    
    85,000
    
    
    
    (8,864
    )CC
    
    
    20,000
    
    
    
    (11,841
    )
    
    
    213,087
    
    
    
    (106,143
    )D
    
    
    38,500
    
    
    
    (21,040
    )
    
    
    41,000
    
    
    
    (21,868
    )Non rated
    
    
    243,780
    
    
    
    (62,166
    )
    
    
    56,482
    
    
    
    (628
    )Total
    
    $
    10,303,014
    
    
    $
    (185,529
    )
    
    $
    13,367,919
    
    
    $
    (189,675
    )Credit Swaps Sold-Tranche:AAA
    
    $
    2,650,000
    
    
    $
    (324,440
    )
    
    $
    1,575,000
    
    
    $
    (120,112
    )AA
    
    
    200,000
    
    
    
    (22,926
    )
    
    
    1,275,000
    
    
    
    (122,406
    )A
    
    
    300,000
    
    
    
    (57,042
    )
    
    
    
    
    
    
    BBB
    
    
    450,000
    
    
    
    (86,996
    )
    
    
    750,000
    
    
    
    (103,601
    )BB
    
    
    150,000
    
    
    
    (30,577
    )
    
    
    100,000
    
    
    
    (12,997
    )B
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    (17,373
    )CCC
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    (45,393
    )C
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    (53,802
    )Non rated
    
    
    50,000
    
    
    
    (28,997
    )
    
    
    
    
    
    
    Total
    
    $
    3,800,000
    
    
    $
    (550,978
    )
    
    $
    4,100,000
    
    
    $
    (475,684
    )CDS on ABS:BBB
    
    $
    736
    
    
    $
    (445
    )
    
    $
    3,682
    
    
    $
    (2,880
    )B
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    (4,357
    )CCC
    
    
    18,000
    
    
    
    (14,321
    )
    
    
    13,000
    
    
    
    (10,534
    )CC
    
    
    10,000
    
    
    
    (9,009
    )
    
    
    10,000
    
    
    
    (8,989
    )Total
    
    $
    28,736
    
    
    $
    (23,775
    )
    
    $
    31,682
    
    
    $
    (26,760
    )
  14




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 June 30, 2010
    
    
    December 31, 2009Notional
    
    
    Fair
    
    
    Notional
    
    
    FairRating Category
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueBy Single Name Reference
Entity/TrancheCredit Swaps Purchased-Single Name:A
    
    $
    (4,120
    )
    
    $
    212
    
    
    $
    (4,120
    )
    
    $
    25CC
    
    
    (4,040
    )
    
    
    2,545
    
    
    
    (4,040
    )
    
    
    2,396Total
    
    $
    (8,160
    )
    
    $
    2,757
    
    
    $
    (8,160
    )
    
    $
    2,421By Counterparty Buyer / (Seller)Credit Swaps Sold-Single Name:AA
    
    $
    2,650,697
    
    
    $
    (22,570
    )
    
    $
    3,263,322
    
    
    $
    (25,340
    )A
    
    
    5,929,464
    
    
    
    (119,615
    )
    
    
    8,888,189
    
    
    
    (136,293
    )BBB
    
    
    20,000
    
    
    
    11
    
    
    
    
    
    
    
    B
    
    
    557,068
    
    
    
    (9,787
    )
    
    
    
    
    
    
    Non rated
    
    
    1,145,785
    
    
    
    (33,568
    )
    
    
    1,216,408
    
    
    
    (28,042
    )Total
    
    $
    10,303,014
    
    
    $
    (185,529
    )
    
    $
    13,367,919
    
    
    $
    (189,675
    )Credit Swaps Sold-Tranche:AA
    
    $
    1,850,000
    
    
    $
    (279,884
    )
    
    $
    1,850,000
    
    
    $
    (199,745
    )A
    
    
    1,500,000
    
    
    
    (184,098
    )
    
    
    1,800,000
    
    
    
    (210,057
    )BBB
    
    
    450,000
    
    
    
    (86,996
    )
    
    
    450,000
    
    
    
    (65,882
    )Total
    
    $
    3,800,000
    
    
    $
    (550,978
    )
    
    $
    4,100,000
    
    
    $
    (475,684
    )CDS on ABS:A
    
    $
    10,000
    
    
    $
    (7,972
    )
    
    $
    26,682
    
    
    $
    (22,380
    )B
    
    
    13,736
    
    
    
    (11,363
    )
    
    
    
    
    
    
    Non rated
    
    
    5,000
    
    
    
    (4,440
    )
    
    
    5,000
    
    
    
    (4,380
    )Total
    
    $
    28,736
    
    
    $
    (23,775
    )
    
    $
    31,682
    
    
    $
    (26,760
    )Credit Swaps Purchased-Single Name:A
    
    $
    (8,160
    )
    
    $
    2,757
    
    
    $
    (8,160
    )
    
    $
    2,421Total
    
    $
    (8,160
    )
    
    $
    2,757
    
    
    $
    (8,160
    )
    
    $
    2,421
  15




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
  June 30, 2010
    
    
    December 31, 2009Notional
    
    
    Fair
    
    
    Notional
    
    
    FairCountry of Domicile
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueCredit Swaps Sold-Single NameBy Reference Entity:North America
    
    $
    5,390,547
    
    
    $
    (122,833
    )
    
    $
    6,836,087
    
    
    $
    (161,513
    )Europe
    
    
    4,405,467
    
    
    
    (57,615
    )
    
    
    5,869,832
    
    
    
    (24,249
    )Asia-Pacific
    
    
    437,000
    
    
    
    (4,737
    )
    
    
    522,000
    
    
    
    (3,714
    )Others
    
    
    70,000
    
    
    
    (344
    )
    
    
    140,000
    
    
    
    (199
    )Total
    
    $
    10,303,014
    
    
    $
    (185,529
    )
    
    $
    13,367,919
    
    
    $
    (189,675
    )By Counterparty:North America
    
    $
    4,965,070
    
    
    $
    (74,799
    )
    
    $
    6,359,144
    
    
    $
    (76,784
    )Europe
    
    
    5,235,944
    
    
    
    (110,554
    )
    
    
    6,891,775
    
    
    
    (111,894
    )Asia-Pacific
    
    
    102,000
    
    
    
    (176
    )
    
    
    117,000
    
    
    
    (997
    )Total
    
    $
    10,303,014
    
    
    $
    (185,529
    )
    
    $
    13,367,919
    
    
    $
    (189,675
    )Credit Swaps Sold -TrancheBy Counterparty:North America
    
    $
    600,000
    
    
    $
    (57,914
    )
    
    $
    600,000
    
    
    $
    (47,099
    )Europe
    
    
    3,200,000
    
    
    
    (493,064
    )
    
    
    3,500,000
    
    
    
    (428,585
    )Total
    
    $
    3,800,000
    
    
    $
    (550,978
    )
    
    $
    4,100,000
    
    
    $
    (475,684
    )CDS on ABSBy Reference Entity:North America
    
    $
    28,736
    
    
    $
    (23,775
    )
    
    $
    31,682
    
    
    $
    (26,760
    )Total
    
    $
    28,736
    
    
    $
    (23,775
    )
    
    $
    31,682
    
    
    $
    (26,760
    )By Counterparty:North America
    
    $
    18,736
    
    
    $
    (15,803
    )
    
    $
    21,682
    
    
    $
    (18,830
    )Europe
    
    
    10,000
    
    
    
    (7,972
    )
    
    
    10,000
    
    
    
    (7,930
    )Total
    
    $
    28,736
    
    
    $
    (23,775
    )
    
    $
    31,682
    
    
    $
    (26,760
    )Credit Swaps Purchased-Single
NameBy Reference Entity:North America
    
    $
    (8,160
    )
    
    $
    2,757
    
    
    $
    (8,160
    )
    
    $
    2,421Total
    
    $
    (8,160
    )
    
    $
    2,757
    
    
    $
    (8,160
    )
    
    $
    2,421By Counterparty:Europe
    
    $
    (8,160
    )
    
    $
    2,757
    
    
    $
    (8,160
    )
    
    $
    2,421Total
    
    $
    (8,160
    )
    
    $
    2,757
    
    
    $
    (8,160
    )
    
    $
    2,421
  16




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
  June 30, 2010
    
    
    December 31, 2009Notional
    
    
    Fair
    
    
    Notional
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueCredit Swaps Sold-Single NameYear of Maturity2010
    
    $
    3,008,984
    
    
    $
    (6,856
    )
    
    $
    5,435,860
    
    
    $
    (24,057
    )2011
    
    
    2,350,636
    
    
    
    (82,730
    )
    
    
    2,510,612
    
    
    
    (101,066
    )2012
    
    
    4,018,732
    
    
    
    (90,556
    )
    
    
    4,394,718
    
    
    
    (69,285
    )2013
    
    
    924,662
    
    
    
    (5,387
    )
    
    
    1,026,729
    
    
    
    4,733Total
    
    $
    10,303,014
    
    
    $
    (185,529
    )
    
    $
    13,367,919
    
    
    $
    (189,675
    )Credit Swaps Sold-TrancheYear of Maturity2012
    
    $
    375,000
    
    
    $
    (26,485
    )
    
    $
    375,000
    
    
    $
    (13,350
    )2013
    
    
    100,000
    
    
    
    (40,620
    )
    
    
    200,000
    
    
    
    (71,175
    )2014
    
    
    3,325,000
    
    
    
    (483,873
    )
    
    
    3,525,000
    
    
    
    (391,159
    )Total
    
    $
    3,800,000
    
    
    $
    (550,978
    )
    
    $
    4,100,000
    
    
    $
    (475,684
    )CDS on ABSEstimated Year of Maturity2010
    
    $
    
    
    
    $
    
    
    
    $
    10,000
    
    
    $
    (8,989
    )2011
    
    
    23,000
    
    
    
    (19,746
    )
    
    
    16,682
    
    
    
    (14,199
    )2012
    
    
    5,000
    
    
    
    (3,584
    )
    
    
    5,000
    
    
    
    (3,572
    )2020
    
    
    736
    
    
    
    (445
    )
    
    
    
    
    
    
    Total
    
    $
    28,736
    
    
    $
    (23,775
    )
    
    $
    31,682
    
    
    $
    (26,760
    )Credit Swaps Purchased-Single
NameYear of Maturity2014
    
    $
    (8,160
    )
    
    $
    2,757
    
    
    $
    (8,160
    )
    
    $
    2,421Total
    
    $
    (8,160
    )
    
    $
    2,757
    
    
    $
    (8,160
    )
    
    $
    2,421
  17




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##### Table of Contents



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




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
   Consolidation
  Three Months Ended
    
    
    Six Months EndedJune 30, 2010
    
    
    June 30, 2010Net CLO lossNet realized gains on CLO loans and securities
    
    $
    19,130
    
    
    $
    48,696Net unrealized losses on CLO loans and securities
    
    
    (68,443
    )
    
    
    (6,366
    )Net realized losses on CLO notes
    
    
    (3,306
    )
    
    
    (6,115
    )Net unrealized losses on CLO notes
    
    
    (73,976
    )
    
    
    (84,952
    )Other income
    
    
    1,753
    
    
    
    1,488Total net CLO loss
    
    $
    (124,842
    )
    
    $
    (47,249
    )
  19




---



##### Table of Contents



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




---



##### Table of Contents



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




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 Nonperformance Risk Adjustment  Credit Swap Portfolio
 Fair Value Measurements and Disclosures,
  June 30,
    
    
    December 31,2010
    
    
    2009Unrealized loss on credit
swaps, at fair value, without
nonperformance risk
adjustments
    
    $
    972,113
    
    
    $
    906,382Nonperformance risk adjustments
    
    
    (214,576
    )
    
    
    (214,477
    )Unrealized loss on credit
swaps, at fair value, after
nonperformance risk
adjustments
    
    $
    757,537
    
    
    $
    691,905
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net credit swap revenue (loss)
without nonperformance risk
adjustments
    
    $
    (252,567
    )
    
    $
    1,247,277
    
    
    $
    (102,277
    )
    
    $
    1,440,592Nonperformance risk adjustments
    
    
    62,859
    
    
    
    (675,394
    )
    
    
    99
    
    
    
    (757,828
    )Net credit swap revenue (loss)
after nonperformance risk
adjustments
    
    $
    (189,708
    )
    
    $
    571,883
    
    
    $
    (102,178
    )
    
    $
    682,764
  22




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 Fair Value Hierarchy Tables
  Quoted Pricesin
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significant
    
    
    Assets /for
    
    
    Observable
    
    
    Unobservable
    
    
    LiabilitiesIdentical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    at Fair(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    ValueAssetsCash and cash equivalents
    
    $
    139,863
    
    
    $
    
    
    
    $
    
    
    
    $
    139,863Investments
    
    
    
    
    
    
    367,117
    
    
    
    1,197
    
    
    
    368,314CLO cash and cash equivalents
    
    
    117,357
    
    
    
    
    
    
    
    
    
    
    
    117,357CLO loans and securities
    
    
    
    
    
    
    2,422,961
    
    
    
    
    
    
    
    2,422,961Unrealized gain on credit swaps
    
    
    
    
    
    
    
    
    
    
    126
    
    
    
    126Other assets
    
    
    
    
    
    
    4,342
    
    
    
    
    
    
    
    4,342Total Assets
    
    $
    257,220
    
    
    $
    2,794,420
    
    
    $
    1,323
    
    
    $
    3,052,963LiabilitiesUnrealized loss on credit swaps
    
    $
    
    
    
    $
    
    
    
    $
    757,537
    
    
    $
    757,537Other liabilities
    
    
    
    
    
    
    
    
    
    
    9,117
    
    
    
    9,117CLO notes
    
    
    
    
    
    
    
    
    
    
    2,266,583
    
    
    
    2,266,583Total Liabilities
    
    $
    
    
    
    $
    
    
    
    $
    3,033,237
    
    
    $
    3,033,237
  Quoted Pricesin
    
    
    Significant
    
    
    
    
    
    
    TotalActive Markets
    
    
    Other
    
    
    Significant
    
    
    Assets /for
    
    
    Observable
    
    
    Unobservable
    
    
    LiabilitiesIdentical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    at Fair(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    ValueAssetsCash and cash equivalents
    
    $
    299,514
    
    
    $
    
    
    
    $
    
    
    
    $
    299,514Investments
    
    
    
    
    
    
    272,931
    
    
    
    1,344
    
    
    
    274,275Unrealized gain on credit swaps
    
    
    
    
    
    
    
    
    
    
    2,207
    
    
    
    2,207Other assets
    
    
    
    
    
    
    1,837
    
    
    
    
    
    
    
    1,837Total Assets
    
    $
    299,514
    
    
    $
    274,768
    
    
    $
    3,551
    
    
    $
    577,833LiabilitiesUnrealized loss on credit swaps
    
    $
    
    
    
    $
    
    
    
    $
    691,905
    
    
    $
    691,905Other liabilities
    
    
    
    
    
    
    
    
    
    
    5,470
    
    
    
    5,470Total Liabilities
    
    $
    
    
    
    $
    
    
    
    $
    697,375
    
    
    $
    697,375
  23




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 Level 3 Assets and Liabilities Reconciliation Tables
  Three Months Ended
    
    
    Three Months EndedJune 30, 2010
    
    
    June 30, 2009Unrealized
    
    
    
    
    
    
    Trading
    
    
    Available-for-Gain on
    
    
    
    
    
    
    Account
    
    
    SaleCredit Swaps
    
    
    Investments
    
    
    Assets
    
    
    InvestmentsBalance, beginning of period
    
    $
    1,873
    
    
    $
    1,152
    
    
    $
    3,830
    
    
    $
    365Realized losses
    
    
    83
    
    
    
    
    
    
    
    2,488
    
    
    
    (194
    )Unrealized gains (losses)
    
    
    (1,830
    )
    
    
    45
    
    
    
    88
    
    
    
    (171
    )Purchases, sales, issuances
and settlements
    
    
    
    
    
    
    
    
    
    
    (6,143
    )
    
    
    Balance, end of period
    
    $
    126
    
    
    $
    1,197
    
    
    $
    263
    
    
    $
    
  Six Months Ended
    
    
    Six Months EndedJune 30, 2010
    
    
    June 30, 2009Unrealized
    
    
    
    
    
    
    Trading
    
    
    Available-for-Gain on
    
    
    
    
    
    
    Account
    
    
    SaleCredit Swaps
    
    
    Investments
    
    
    Assets
    
    
    InvestmentsBalance, beginning of period
    
    $
    2,207
    
    
    $
    1,344
    
    
    $
    3,940
    
    
    $
    796Realized losses
    
    
    83
    
    
    
    
    
    
    
    2,378
    
    
    
    (808
    )Unrealized gains (losses)
    
    
    (2,164
    )
    
    
    (9
    )
    
    
    88
    
    
    
    Purchases, sales, issuances
and settlements
    
    
    
    
    
    
    (138
    )
    
    
    (6,143
    )
    
    
    12Balance, end of period
    
    $
    126
    
    
    $
    1,197
    
    
    $
    263
    
    
    $
    
   24




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
  Three Months Ended
    
    
    Three Months EndedJune 30, 2010
    
    
    June 30, 2009Unrealized
    
    
    UnrealizedOther
    
    
    Loss on Credit
    
    
    Loss on CreditCLO Notes
    
    
    Liabilities
    
    
    Swaps
    
    
    SwapsBalance, beginning of period
    
    $
    (2,208,804
    )
    
    $
    (6,812
    )
    
    $
    (564,436
    )
    
    $
    (2,050,571
    )Adoption of ASC Topic 810,
Consolidation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Realized losses
    
    
    (3,306
    )
    
    
    
    
    
    
    10,011
    
    
    
    2,975Unrealized gains (losses)
    
    
    (73,976
    )
    
    
    (2,305
    )
    
    
    (203,112
    )
    
    
    549,649Purchases, sales, issuances
and settlements
    
    
    19,503
    
    
    
    
    
    
    
    
    
    
    
    Balance, end of period
    
    $
    (2,266,583
    )
    
    $
    (9,117
    )
    
    $
    (757,537
    )
    
    $
    (1,497,947
    )
  Six Months Ended
    
    
    Six Months EndedJune 30, 2010
    
    
    June 30, 2009Unrealized
    
    
    UnrealizedOther
    
    
    Loss on Credit
    
    
    Loss on CreditCLO Notes
    
    
    Liabilities
    
    
    Swaps
    
    
    SwapsBalance, beginning of period
    
    $
    
    
    
    $
    (5,470
    )
    
    $
    (691,905
    )
    
    $
    (2,173,461
    )Adoption of ASC Topic 810,
Consolidation
    
    
    (2,210,642
    )
    
    
    
    
    
    
    
    
    
    
    Realized losses
    
    
    (6,115
    )
    
    
    
    
    
    
    66,053
    
    
    
    37,453Unrealized gains (losses)
    
    
    (84,952
    )
    
    
    (3,647
    )
    
    
    (131,685
    )
    
    
    638,061Purchases, sales, issuances
and settlements
    
    
    35,126
    
    
    
    
    
    
    
    
    
    
    
    Balance, end of period
    
    $
    (2,266,583
    )
    
    $
    (9,117
    )
    
    $
    (757,537
    )
    
    $
    (1,497,947
    )
   25




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##### Table of Contents



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




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 7. Primus Absolute Return Credit Fund and Primus Credit Strategies Fund
  8. Earnings per Share
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income (loss)
available to common shares
    
    $
    (188,394
    )
    
    $
    596,928
    
    
    $
    (101,872
    )
    
    $
    703,736Weighted-average basic shares
outstanding
    
    
    38,903
    
    
    
    40,430
    
    
    
    38,795
    
    
    
    40,646Effect of dilutive instruments:Restricted share units
    
    
    
    
    
    
    838
    
    
    
    
    
    
    
    450Weighted-average diluted shares
    
    
    38,903
    
    
    
    41,268
    
    
    
    38,795
    
    
    
    41,096Basic EPS
    
    $
    (4.84
    )
    
    $
    14.76
    
    
    $
    (2.63
    )
    
    $
    17.31Diluted EPS
    
    $
    (4.84
    )
    
    $
    14.46
    
    
    $
    (2.63
    )
    
    $
    17.12
   9. Share  Based Compensation
    27




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##### Table of Contents



10. Comprehensive Income (Loss)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income (loss)
    
    $
    (313,604
    )
    
    $
    597,998
    
    
    $
    (136,681
    )
    
    $
    705,750Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    (36
    )
    
    
    193
    
    
    
    (74
    )
    
    
    117Change in net unrealized gains (losses)
on available-for-sale investments
    
    
    1,423
    
    
    
    989
    
    
    
    2,805
    
    
    
    (1,407
    )Comprehensive income (loss)
    
    
    (312,217
    )
    
    
    599,180
    
    
    
    (133,950
    )
    
    
    704,460Less: Distributions on preferred
securities of subsidiary
    
    
    724
    
    
    
    1,070
    
    
    
    1,712
    
    
    
    2,014Less: Net loss attributable to non-parent
interests in CLOs
    
    
    (125,934
    )
    
    
    
    
    
    
    (36,521
    )
    
    
    Comprehensive income (loss) available to
common shares
    
    $
    (187,007
    )
    
    $
    598,110
    
    
    $
    (99,141
    )
    
    $
    702,446
 11. Income Taxes
  12. Subsequent Event
   28




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 13. Segment Reporting
 Consolidation Consolidation
  Three Months Ended June 30, 2010CreditProtection,AssetManagementand
    
    
    CLOs
    
    
    
    
    
    
    ConsolidatedCorporate
    
    
    Standalone
    
    
    Eliminations
    
    
    TotalsRevenues:Net credit swap loss
    
    $
    (189,708
    )
    
    $
    
    
    
    $
    
    
    
    $
    (189,708
    )Net CLO loss
    
    
    
    
    
    
    (129,282
    )
    
    
    4,440
    
    
    
    (124,842
    )CLO Interest income
    
    
    
    
    
    
    19,510
    
    
    
    
    
    
    
    19,510Asset management and advisory fees
    
    
    5,501
    
    
    
    
    
    
    
    (5,238
    )
    
    
    263Interest income
    
    
    3,905
    
    
    
    
    
    
    
    (364
    )
    
    
    3,541Gain on retirement of long-term debt
    
    
    2,676
    
    
    
    
    
    
    
    
    
    
    
    2,676Other income
    
    
    4,217
    
    
    
    
    
    
    
    (4,440
    )
    
    
    (223
    )Total revenues (losses)
    
    $
    (173,409
    )
    
    $
    (109,772
    )
    
    $
    (5,602
    )
    
    $
    (288,783
    )Expenses:CLO interest expense
    
    $
    
    
    
    $
    8,622
    
    
    $
    (364
    )
    
    $
    8,258CLO expenses
    
    
    
    
    
    
    7,540
    
    
    
    (5,238
    )
    
    
    2,302Compensation and employee benefits
    
    
    5,766
    
    
    
    
    
    
    
    
    
    
    
    5,766Professional and legal fees
    
    
    2,308
    
    
    
    
    
    
    
    
    
    
    
    2,308Interest expense
    
    
    1,737
    
    
    
    
    
    
    
    
    
    
    
    1,737Other expenses
    
    
    4,590
    
    
    
    
    
    
    
    
    
    
    
    4,590Total expenses
    
    $
    14,401
    
    
    $
    16,162
    
    
    $
    (5,602
    )
    
    $
    24,961Income (loss) before provision for income taxes
    
    $
    (187,810
    )
    
    $
    (125,934
    )
    
    $
    
    
    
    $
    (313,744
    )Provision (benefit) for income tax
    
    
    (140
    )
    
    
    
    
    
    
    
    
    
    
    (140
    )Net loss
    
    $
    (187,670
    )
    
    $
    (125,934
    )
    
    $
    
    
    
    $
    (313,604
    )Less: Distributions on preferred securities of subsidiary
    
    
    724
    
    
    
    
    
    
    
    
    
    
    
    724Less: Net loss attributable to non-parent interests in CLOs
    
    $
    
    
    
    $
    (125,934
    )
    
    $
    
    
    
    $
    (125,934
    )Net loss available to common shares
    
    $
    (188,394
    )
    
    $
    
    
    
    $
    
    
    
    $
    (188,394
    )Segment assets
    
    $
    666,222
    
    
    $
    2,596,413
    
    
    $
    
    
    
    $
    3,262,635
  29




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
  Six Months Ended June 30, 2010CreditProtection,AssetManagementand
    
    
    CLOs
    
    
    
    
    
    
    ConsolidatedCorporate
    
    
    Standalone
    
    
    Eliminations
    
    
    TotalsRevenues:Net credit swap loss
    
    $
    (102,178
    )
    
    $
    
    
    
    $
    
    
    
    $
    (102,178
    )Net CLO loss
    
    
    
    
    
    
    (54,856
    )
    
    
    7,607
    
    
    
    (47,249
    )CLO Interest income
    
    
    
    
    
    
    42,932
    
    
    
    
    
    
    
    42,932Asset management and advisory fees
    
    
    7,400
    
    
    
    
    
    
    
    (6,846
    )
    
    
    554Interest income
    
    
    6,605
    
    
    
    
    
    
    
    (364
    )
    
    
    6,241Gain on retirement of long-term debt
    
    
    7,433
    
    
    
    
    
    
    
    
    
    
    
    7,433Other income
    
    
    7,453
    
    
    
    
    
    
    
    (7,607
    )
    
    
    (154
    )Total revenues (losses)
    
    $
    (73,287
    )
    
    $
    (11,924
    )
    
    $
    (7,210
    )
    
    $
    (92,421
    )Expenses:CLO interest expense
    
    $
    
    
    
    $
    14,459
    
    
    $
    (364
    )
    
    $
    14,095CLO expenses
    
    
    
    
    
    
    10,138
    
    
    
    (6,846
    )
    
    
    3,292Compensation and employee benefits
    
    
    11,191
    
    
    
    
    
    
    
    
    
    
    
    11,191Professional and legal fees
    
    
    3,947
    
    
    
    
    
    
    
    
    
    
    
    3,947Interest expense
    
    
    3,606
    
    
    
    
    
    
    
    
    
    
    
    3,606Other expenses
    
    
    8,126
    
    
    
    
    
    
    
    
    
    
    
    8,126Total expenses
    
    $
    26,870
    
    
    $
    24,597
    
    
    $
    (7,210
    )
    
    $
    44,257Income (loss) before provision for income taxes
    
    $
    (100,157
    )
    
    $
    (36,521
    )
    
    $
    
    
    
    $
    (136,678
    )Provision for income tax
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3Net loss
    
    $
    (100,160
    )
    
    $
    (36,521
    )
    
    $
    
    
    
    $
    (136,681
    )Less: Distributions on preferred securities of subsidiary
    
    
    1,712
    
    
    
    
    
    
    
    
    
    
    
    1,712Less: Net loss attributable to non-parent interests in
CLOs
    
    $
    
    
    
    $
    (36,521
    )
    
    $
    
    
    
    $
    (36,521
    )Net loss available to common shares
    
    $
    (101,872
    )
    
    $
    
    
    
    $
    
    
    
    $
    (101,872
    )Segment assets
    
    $
    666,222
    
    
    $
    2,596,413
    
    
    $
    
    
    
    $
    3,262,635
  30




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##### Table of Contents



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




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##### Table of Contents



Executive Overview and Business Outlook
    Consolidation
   32




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##### Table of Contents



33




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##### Table of Contents



Critical Accounting Policies
  Consolidation,
 Impact of Adoption of ASC Topic 810, Consolidation
 Consolidation
    34




---



##### Table of Contents



Nonperformance Risk Adjustment
 Fair Value Measurements and Disclosures,
 Fair Value Hierarchy  Level 3 Assets and Liabilities
   Counterparty Default  Lehman Brothers Special Financing Inc.
    35




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##### Table of Contents



Results of Operations
 Introduction
 Consolidation Consolidation
    Three Months Ended June 30, 2010 Compared With Three Months Ended June 30, 2009
 Overview of Financial Results
      36




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##### 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 30,2010
    
    
    2009Net premiums earned
    
    $
    15,234
    
    
    $
    22,234Net realized losses on credit swaps
    
    
    (10,094
    )
    
    
    (2,975
    )Net unrealized gains (losses) on credit swaps
    
    
    (194,848
    )
    
    
    552,624Total net credit swap revenue (loss)
    
    $
    (189,708
    )
    
    $
    571,883
 Net Premiums Earned
   37




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##### Table of Contents



Net Realized Losses on Credit Swaps
  Net Unrealized Gains (Losses) on Credit Swaps
  Net CLO Loss
  CLO Interest Income
  Asset Management and Advisory Fees
     38




---



##### Table of Contents



Interest Income
   Gain on Retirement of Long-Term Debt
    Impairment Loss on Investments
  Other Income (Loss)
    39




---



##### Table of Contents



Operating Expenses
  Three Months EndedJune 30,2010
    
    
    2009CLO expenses
    
    $
    2,302
    
    
    $
    Compensation and employee benefits
    
    
    5,766
    
    
    
    4,566Professional and legal fees
    
    
    2,308
    
    
    
    1,957Other
    
    
    4,590
    
    
    
    2,146Total operating expenses
    
    $
    14,966
    
    
    $
    8,669Number of full-time employees, at end of period
    
    
    46
    
    
    
    37
     CLO Interest Expense
   40




---



##### Table of Contents



Interest Expense and Preferred Distributions
 Interest Expense
     Preferred Distributions
   41




---



##### Table of Contents



Provision (Benefit) for Income Taxes
  Six Months Ended June 30, 2010 Compared With Six Months Ended June 30, 2009
 Overview of Financial Results
       42




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##### 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.
  Six Months EndedJune 30,2010
    
    
    2009Net premiums earned
    
    $
    31,670
    
    
    $
    44,703Net realized losses on credit swaps
    
    
    (66,136
    )
    
    
    (37,453
    )Net unrealized gains (losses) on credit swaps
    
    
    (67,712
    )
    
    
    675,514Total net credit swap revenue (loss)
    
    $
    (102,178
    )
    
    $
    682,764
 Net Premiums Earned
   43




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##### Table of Contents



Net Realized Losses on Credit Swaps
  Net Unrealized Gains (Losses) on Credit Swaps
  Net CLO Loss
  CLO Interest Income
  Asset Management and Advisory Fees
     44




---



##### Table of Contents



Interest Income
   Gain on Retirement of Long-Term Debt
    Impairment Loss on Investments
  Other Income (Loss)
    45




---



##### Table of Contents



Operating Expenses
  Six Months EndedJune 30,2010
    
    
    2009CLO expenses
    
    $
    3,292
    
    
    $
    Compensation and employee benefits
    
    
    11,191
    
    
    
    9,281Professional and legal fees
    
    
    3,947
    
    
    
    3,378Other
    
    
    8,126
    
    
    
    4,105Total operating expenses
    
    $
    26,556
    
    
    $
    16,764Number of full-time employees, at end of period
    
    
    46
    
    
    
    37
     CLO Interest Expense
   46




---



##### Table of Contents



Interest Expense and Preferred Distributions
 Interest Expense
     Preferred Distributions
  Provision for Income Taxes
   47




---



##### Table of Contents



Income Taxes
   Non-GAAP Financial Measures  Economic Results
  Consolidation,
  48




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##### Table of Contents



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




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009GAAP net income (loss) available to common shares
    
    $
    (188,394
    )
    
    $
    596,928
    
    
    $
    (101,872
    )
    
    $
    703,736Adjustments:Change in unrealized fair value of credit swaps sold (gain) loss by Primus Financial
    
    
    194,963
    
    
    
    (552,624
    )
    
    
    67,827
    
    
    
    (675,514
    )Realized gains from early termination of credit swaps sold by Primus Financial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of realized gains from the early termination of credit swap sold by
Primus Financial
    
    
    264
    
    
    
    368
    
    
    
    558
    
    
    
    761Provision for CDS on ABS credit events
    
    
    
    
    
    
    (188
    )
    
    
    (2,374
    )
    
    
    (15,242
    )Reduction in provision for CDS on ABS credit events upon termination of credit swaps
    
    
    
    
    
    
    3,000
    
    
    
    1,819
    
    
    
    27,628Net Economic Results
    
    $
    6,833
    
    
    $
    47,484
    
    
    $
    (34,042
    )
    
    $
    41,369Economic Results earnings per GAAP diluted share
    
    $
    0.18
    
    
    $
    1.15
    
    
    $
    (0.88
    )
    
    $
    1.01Economic Results weighted average common shares outstanding  GAAP diluted
    
    
    38,903
    
    
    
    41,268
    
    
    
    38,795
    
    
    
    41,096
  Off-Balance Sheet Arrangements
   50




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Contractual Obligations
  Payment due by periodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsProperty leases
    
    $
    8,570
    
    
    $
    1,764
    
    
    $
    3,049
    
    
    $
    2,312
    
    
    $
    1,4457% Senior Notes
    
    
    91,463
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91,463Interest on 7% Senior Notes (a)
    
    
    163,474
    
    
    
    2,291
    
    
    
    10,797
    
    
    
    12,805
    
    
    
    137,581Subordinated deferrable interest notes
    
    
    130,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    130,500Interest on subordinated deferrable interest notes
(b)
    
    
    68,337
    
    
    
    4,622
    
    
    
    9,256
    
    
    
    9,243
    
    
    
    45,216Total
    
    $
    462,344
    
    
    $
    8,677
    
    
    $
    23,102
    
    
    $
    24,360
    
    
    $
    406,205
 (a)
    
    Net interest payments on the outstanding 7% Senior Notes at June 30, 2010 are adjusted by the
interest rate swap agreement, which converts a portion of the interest payment on the 7% Senior
Notes from a fixed to a floating basis, as previously discussed. Future payments of interest on the
interest rate swap will be determined by future LIBOR rates, to which a predetermined contractual
rate is added. For the purpose of this table, estimated future LIBOR rates were based on the last
rate set during the second quarter of 2010. The counterparty has the right to terminate the
interest rate swap agreement in 2011, and for the purpose of this table, the interest rate swap is
assumed to be terminated at that date.(b)
    
    Future payments for interest on our subordinated deferrable interest notes will be determined
by future LIBOR rates, to which a predetermined contractual spread is added, as previously
discussed. For the purpose of this table, estimated future LIBOR rates were based on the last rate
set during the second quarter of 2010. Property leases:
  CLOs:
   51




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Liquidity and Capital Resources
          52




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Cash Flows
 Cash flows from operating activities 
 Cash flows from investing activities 
 Cash flows from financing activities 
   53




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Cautionary Note Regarding Forward-Looking Statements
  
    
    fluctuations in the economic, credit, interest rate or foreign
currency environment in the United States and abroad;
    
    the level of activity within the national and international credit markets;
    
    the level of activity in the leveraged buyout and private equity markets;
    
    competitive conditions and pricing levels;
    
    change in rating agency requirements or methodology;
    
    counterparty limits and risk;
    
    legislative and regulatory developments, including changes in accounting principles;
    
    technological developments;
    
    changes in tax laws;
    
    changes in international or national political or economic conditions,
including any terrorist attacks;
    
    successful implementation of our 2010 Business Outlook and our ability
to build upon the integration of the CypressTree acquisition and to
manage its CLOs and other products;
    
    our ability to attract third-party capital to Primus Asset Managements
managed funds and our asset management business generally;
    
    the effects of implementation of new or revised accounting pronouncements; and
    
    uncertainties that have not been identified at this time.
  54




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Item 3. Quantitative and Qualitative Disclosures about Market Risk
     55




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Item 4. Controls and Procedures
   
 Part II. Other Information
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
   56




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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Issuer Purchases of Equity Securities
  Total Number of
    
    
    Approximate DollarTotal
    
    
    
    
    
    
    Shares Purchased
    
    
    Value of Shares thatNumber of
    
    
    Average
    
    
    as Part of Publicly
    
    
    May Yet Be PurchasedShares
    
    
    Price Paid
    
    
    Announced Plans
    
    
    under the Plans orPeriod
    
    Purchased
    
    
    per Share
    
    
    or Programs
    
    
    Programs (a)April 1  30
    
    
    17,000
    
    
    $
    4.23
    
    
    
    17,000
    
    
    $
    26,342,851May 1  31
    
    
    162,109
    
    
    $
    4.11
    
    
    
    162,109
    
    
    $
    25,676,583June 1  30
    
    
    286,430
    
    
    $
    3.84
    
    
    
    286,430
    
    
    $
    24,576,692Total
    
    
    465,539
    
    
    $
    
    
    
    

    465,539
 (a)
    
    On October 8, 2008, our board of directors authorized the implementation of a buyback
program for the purchase of our common shares and/or the 7% Senior Notes in the aggregate up to
$25.0 million. On February 3, 2010, our board of directors authorized an additional expenditure of
up to $15.0 million of available cash for the purchase of our common shares and/or our 7% Senior
Notes. The amounts in this column do not reflect the cost of approximately $13.7 million for
purchases of our 7% Senior Notes, since inception of our buyback program through the quarter ended
June 30, 2010. 
 Item 6. Exhibits
  12
    
    
    Ratio of Earnings to Combined Fixed Charges and Preferred Share Dividend Requirements31.1
    
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
  57




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SIGNATURES
  PRIMUS GUARANTY, LTD./s/ Thomas W. JasperThomas W. JasperChief Executive Officer/s/ Richard ClaidenRichard ClaidenChief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)   58