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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 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
(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
 Securities registered pursuant to Section 12(b) of the Exchange Act:
 Title of each class
    
    Name on each exchange on which registeredCommon Shares, $0.08 par value
    
    New York Stock Exchange7% Senior Notes due 2036
    
    New York Stock Exchange
 Securities registered pursuant to Section 12(g) of the Exchange Act: None
 o þ
 o þ
 þ o
 o o
 þ
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



Primus Guaranty, Ltd.
Form 10-K
For the fiscal year ended December 31, 2010
 INDEX
 PagePart I.Item 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    16Item 1B. Unresolved Staff Comments
    
    
    23Item 2. Properties
    
    
    23Item 3. Legal Proceedings
    
    
    23Part II.Item 5. Market for Registrants Common Equity, Related Shareholder Matters and
Issuer Purchases of Equity Securities
    
    
    24Item 6. Selected Financial Data
    
    
    27Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    29Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    49Item 8. Financial Statements and Supplementary Data
    
    
    50Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    95Item 9A. Controls and Procedures
    
    
    95Item 9B. Other Information
    
    
    95Part III.Item 10. Directors, Executive Officers and Corporate Governance
    
    
    95Item 11. Executive Compensation
    
    
    97Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
    
    
    97Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    97Item 14. Principal Accountant Fees and Services
    
    
    97Part IV.Item 15. Exhibits and Financial Statement Schedules
    
    
    98Signatures
    
    
    100EX-10.2EX-10.3EX-10.4EX-10.9EX-10.11EX-10.12EX-10.15EX-12EX-21EX-23EX-31.1EX-31.2EX-32
   2




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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 This Annual Report on Form 10-K contains forward-looking statements within the meaning of the
safe harbor provisions of U.S. Private Securities Litigation Reform Act of 1995 with respect to our
future financial or business performance, strategies or expectations. Forward-looking statements
are subject to numerous assumptions, risks and uncertainties, which change over time. All
statements, other than statements of historical facts, included in this document regarding our
strategy, future operations, future financial position, future revenues, projected costs,
prospects, plans and objectives of management are forward-looking statements. The words
anticipate, believe, estimate, expect, intend, may, plan, potential, project,
opportunity, seek, will, would and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain these identifying
words. We may not actually achieve the plans, intentions or expectations disclosed in our
forward-looking statements and you should not place undue reliance on our forward-looking
statements. Actual results or events could differ materially from the plans, intentions and
expectations disclosed in the forward-looking statements we make and future results could differ
materially from historical performance. We have included important factors in the cautionary
statements included in this Annual Report on Form 10-K , particularly in the Risk Factors section,
that we believe could cause actual results or events to differ materially from the forward-looking
statements that we make. Our forward-looking statements do not reflect the potential impact of any
future acquisitions, mergers, dispositions, joint ventures or investments we may make.
Forward-looking statements speak only as of the date they are made, and we do not assume any
obligation to, and do not undertake to, update any forward-looking statements.
 
 Part I.
 
 Item 1.
    
    Business
 Unless otherwise indicated or the context otherwise requires, references to (i) we, us, our,
Company, Primus or Primus Guaranty refers to the consolidated operations of Primus Guaranty,
Ltd.; (ii) Primus Asset Management refers to Primus Asset Management, Inc., (iii) references to
Primus Financial refers to Primus Financial Products, LLC alone or collectively with its wholly
owned subsidiaries; and (iv) each other single company name refers solely to such company.
 Overview
      3




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Primus Financial
    Bankruptcy Remoteness
  Credit Swap Portfolio-Primus Financial
  Single Name Credit Swaps
   4




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Single Name Portfolio Distribution by S&P Industry Classification
 
  5




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Tranches
  CDS on ABS
   Counterparties
   Primus Asset Management
  Primus Guaranty (UK)
  Primus Re
   6




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Other Subsidiaries
  Risk Management Policies and Oversight
  Investments and Investment Policy
  Technology
  Competition
  Employees
  Additional Information
 www.primusguaranty.com www.sec.gov
  7




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Certain Bermuda Law Considerations
 In this discussion, references to (i) Primus Guaranty are references solely to Primus
Guaranty, Ltd. and not to any of its consolidated operations; and (ii) BD$ are references to
Bermuda Dollars.
      8




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TAX CONSIDERATIONS
   Taxation of Shareholders
 Bermuda Taxation
  U.S. Taxation
  U.S. Holders
   9




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Passive Foreign Investment Companies
     10




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www.primusguaranty.com.
   11




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Shareholders are urged to consult with their tax advisors regarding the likely classification
of Primus Guaranty and Primus Bermuda as PFICs and the advisability of making QEF elections with
respect to Primus Guaranty and Primus Bermuda.
 Alternative Characterizations.
  Non-U.S. Holders
   12




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Taxation of Primus Guaranty and Its Subsidiaries
 Bermuda Taxation
 Primus Guaranty, Primus Bermuda and Primus Re.
 U.S. Taxation
 Primus Guaranty, Primus Bermuda, Primus Financial and PGUK.
  13




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14




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Primus Asset Management.
   Primus Re.
 Personal Holding Company Tax and Accumulated Earnings Tax.
 Backup Withholding
  15




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Item 1A.
    
    Risk Factors
 Risks Related to Our Business and Operations
 General economic and conditions in the global financial and credit markets may materially
adversely affect our loss experience and our financial results.
     The failure to manage effectively the risk of credit losses would have a material adverse
effect on our financial condition and results of operations.
   16




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Primus Financials tranche portfolio of credit swaps also creates risks for us.
  Primus Financials counterparties are primarily global financial institutions and major credit
swap dealers. A default by a major counterparty could have a material adverse impact on Primus
Financial.
  Variations in market credit swap premiums and correlation levels could cause our financial
results to be volatile.
   17




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We are exposed to significant credit market risk related to changes in foreign exchange rates
which may adversely affect our results of operations, financial condition or cash flows.
  A significant proportion of our capital is invested in corporate securities. We cannot be
assured that there will not be defaults or adverse price movements or defaults in these securities.
  Our operations may become subject to increased regulation or existing regulations may change,
which may result in administrative burdens, increased costs or other adverse consequences.
  During 2010, the Company changed its strategy and sold or terminated the majority of its asset
management initiatives in order to concentrate on the amortization of Primus Financials credit
swap portfolio.
  We may have difficulty in servicing our outstanding debt.
   18




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We may require additional capital in the future, which may not be available on favorable terms
or at all.
    Certain of our principal shareholders control us.
  Our rights plan may have anti-takeover effects that could prevent a change of control.
   19




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There can be no assurance that funds will be available to pay cash dividends on our common
shares.
  We depend on a limited number of key employees. If we are not able to retain or replace key
employees, we may be unable to operate our business successfully.
  We are highly dependent on information systems and third-party service providers.
  We face potential exposure to litigation and claims within our business and strategy.
   20




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Risks Related to Taxation
 Our status as a PFIC may result in significant additional tax costs for shareholders who are
U.S. taxpayers.
  If we are found to be engaged in a U.S. trade or business, we may be liable for significant
U.S. taxes.
   21




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If the IRS successfully challenges the treatment Primus Financial has adopted for its credit
swap transactions, the timing and character of taxable income recognized by Primus Financial could
be adversely affected.
  Risks Related to Our Status as a Bermuda Company
 It may be difficult to effect service of process and enforcement of judgments against us and
our officers and directors .
  U.S. persons who own our common shares may have more difficulty in protecting their interests
than U.S. persons who are shareholders of a U.S. corporation.
   22




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We may become subject to taxes in Bermuda after 2016, which may have a material adverse effect
on our financial condition and operating results.
  Considerations related to the Organization for Economic Cooperation and Development and the
European Union.
   
 Item 1B.
    
    Unresolved Staff Comments
  
 Item 2.
    
    Properties
    
 Item 3.
    
    Legal Proceedings
    23




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Part II.
 
 Item 5.
    
    Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
 Market Information
  Year ended December 31, 2010
    
    High
    
    
    Low
    
    
    CloseFirst Quarter
    
    $
    4.38
    
    
    $
    3.04
    
    
    $
    4.20Second Quarter
    
    $
    4.82
    
    
    $
    3.44
    
    
    $
    3.69Third Quarter
    
    $
    4.78
    
    
    $
    3.41
    
    
    $
    4.56Fourth Quarter
    
    $
    5.66
    
    
    $
    4.49
    
    
    $
    5.08
 Year ended December 31, 2009
    
    High
    
    
    Low
    
    
    CloseFirst Quarter
    
    $
    1.99
    
    
    $
    1.00
    
    
    $
    1.57Second Quarter
    
    $
    2.99
    
    
    $
    1.53
    
    
    $
    2.36Third Quarter
    
    $
    4.41
    
    
    $
    2.15
    
    
    $
    4.27Fourth Quarter
    
    $
    4.27
    
    
    $
    1.89
    
    
    $
    3.05
  24




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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)October 1 - 31
    
    
    221,561
    
    
    $
    4.82
    
    
    
    221,561
    
    
    $
    33,821,861November 1 - 30
    
    
    121,511
    
    
    $
    4.94
    
    
    
    121,511
    
    
    $
    33,221,597December 1 - 31
    
    
    7,000
    
    
    $
    5.05
    
    
    
    7,000
    
    
    $
    33,186,247Total
    
    
    350,072
    
    
    $
    4.86
    
    
    
    350,072
 (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 our 7% Senior Notes in the aggregate up to
$25.0 million. On February 3, 2010, our board of directors authorized an additional expenditure of
up to $15.0 million of available cash for the purchase of our common shares and/or our 7% Senior
Notes. On July 29, 2010, our board of directors authorized an additional expenditure of up to $5.0
million of available cash for the purchase of our common shares and/or our 7% Senior Notes. On
October 27, 2010, our board of directors authorized an additional expenditure of up to $10.0
million of available cash for the purchase of our common shares and/or our 7% Senior Notes. The
amounts in this column do not reflect the cost of approximately $14.5 million for purchases of our
7% Senior Notes, since inception of our buyback program through the quarter ended December 31,
2010. Securities Authorized for Issuance under Equity Compensation Plans
  Shareholder Information
  Dividend and Distribution Information
    25




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Performance Graph
  
 Cumulative Total Return12/31/05
    
    
    12/31/06
    
    
    12/31/07
    
    
    12/31/08
    
    
    12/31/09
    
    
    12/31/10Primus Guaranty, Ltd.
    
    $
    100.00
    
    
    $
    88.50
    
    
    $
    53.67
    
    
    $
    8.74
    
    
    $
    23.37
    
    
    $
    38.93S&P Small Cap 600 Index
    
    $
    100.00
    
    
    $
    115.12
    
    
    $
    114.78
    
    
    $
    79.11
    
    
    $
    99.35
    
    
    $
    125.49Russell 1000 Financial Sector
    
    $
    100.00
    
    
    $
    116.29
    
    
    $
    94.71
    
    
    $
    44.61
    
    
    $
    52.36
    
    
    $
    57.64
  26




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Item 6.
    
    Selected Financial Data
  Years Ended December 31,(in thousands, except per share data)
    
    2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006Statements of Operations Data:Revenues:Net credit swap revenue (loss) (1)
    
    $
    267,756
    
    
    $
    1,455,802
    
    
    $
    (1,688,872
    )
    
    $
    (535,064
    )
    
    $
    116,083Interest income
    
    
    13,140
    
    
    
    6,685
    
    
    
    25,483
    
    
    
    40,401
    
    
    
    28,374Gain on retirement of long-term debt
    
    
    9,866
    
    
    
    43,151
    
    
    
    9,716
    
    
    
    
    
    
    
    Other income
    
    
    3,391
    
    
    
    3,797
    
    
    
    (240
    )
    
    
    (3,476
    )
    
    
    2,267Total revenues (losses)
    
    $
    294,153
    
    
    $
    1,509,435
    
    
    $
    (1,653,913
    )
    
    $
    (498,139
    )
    
    $
    146,724Expenses:Compensation and employee benefits
    
    $
    18,650
    
    
    $
    17,661
    
    
    $
    14,595
    
    
    $
    20,097
    
    
    $
    19,844Interest expense
    
    
    7,031
    
    
    
    9,116
    
    
    
    17,032
    
    
    
    20,729
    
    
    
    10,849Other expenses
    
    
    21,600
    
    
    
    15,355
    
    
    
    14,363
    
    
    
    19,809
    
    
    
    14,157Total expenses
    
    $
    47,281
    
    
    $
    42,132
    
    
    $
    45,990
    
    
    $
    60,635
    
    
    $
    44,850Income (loss) from continuing operations
before provision (benefit) for income taxes
    
    $
    246,872
    
    
    $
    1,467,303
    
    
    $
    (1,699,903
    )
    
    $
    (558,774
    )
    
    $
    101,874Provision (benefit) for income tax
    
    
    (134
    )
    
    
    184
    
    
    
    61
    
    
    
    52
    
    
    
    42Income (loss) from continuing operations
    
    
    247,006
    
    
    
    1,467,119
    
    
    
    (1,699,964
    )
    
    
    (558,826
    )
    
    
    101,832Income (loss) from discontinued operations,
net of tax
    
    
    (49,544
    )
    
    
    (3,422
    )
    
    
    (9,540
    )
    
    
    2,853
    
    
    
    (1,258
    )Net income (loss)
    
    $
    197,462
    
    
    $
    1,463,697
    
    
    $
    (1,709,504
    )
    
    $
    (555,973
    )
    
    $
    100,574Distributions on preferred securities of
subsidiary
    
    $
    3,162
    
    
    $
    3,417
    
    
    $
    6,642
    
    
    $
    7,568
    
    
    $
    5,683Net loss from discontinued operations
attributable to non-parent interests in
CLOs
    
    
    (61,174
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) available to common
shares
    
    $
    255,474
    
    
    $
    1,460,280
    
    
    $
    (1,716,146
    )
    
    $
    (563,541
    )
    
    $
    94,891Basic earnings (loss) per share:Income (loss) from continuing operations
    
    $
    6.36
    
    
    $
    36.46
    
    
    $
    (38.16
    )
    
    $
    (12.64
    )
    
    $
    2.22Income (loss) from discontinued
operations
    
    $
    0.30
    
    
    $
    (0.08
    )
    
    $
    (0.21
    )
    
    $
    0.06
    
    
    $
    (0.03
    )Net income (loss) available to common
shares
    
    $
    6.66
    
    
    $
    36.38
    
    
    $
    (38.37
    )
    
    $
    (12.58
    )
    
    $
    2.19Diluted earnings (loss) per share:Income (loss) from continuing operations
    
    $
    6.04
    
    
    $
    35.34
    
    
    $
    (38.16
    )
    
    $
    (12.64
    )
    
    $
    2.16Income (loss) from discontinued
operations
    
    $
    0.29
    
    
    $
    (0.08
    )
    
    $
    (0.21
    )
    
    $
    0.06
    
    
    $
    (0.03
    )Net income (loss) available to common
shares
    
    $
    6.33
    
    
    $
    35.26
    
    
    $
    (38.37
    )
    
    $
    (12.58
    )
    
    $
    2.13Weighted average number of common shares
outstanding:Basic
    
    
    38,361
    
    
    
    40,142
    
    
    
    44,722
    
    
    
    44,808
    
    
    
    43,306Diluted
    
    
    40,366
    
    
    
    41,414
    
    
    
    44,722
    
    
    
    44,808
    
    
    
    44,472(1)     Net credit swap revenue (loss) consists of the following:Net premiums earned
    
    $
    58,100
    
    
    $
    85,116
    
    
    $
    102,515
    
    
    $
    84,771
    
    
    $
    69,408Net realized gains (losses) on credit swaps
    
    
    (86,884
    )
    
    
    (113,077
    )
    
    
    (161,957
    )
    
    
    (5,190
    )
    
    
    (1,769
    )Net unrealized gains (losses) on credit
swaps
    
    
    296,540
    
    
    
    1,483,763
    
    
    
    (1,629,430
    )
    
    
    (614,645
    )
    
    
    48,444Total net credit swap revenue (loss)
    
    $
    267,756
    
    
    $
    1,455,802
    
    
    $
    (1,688,872
    )
    
    $
    (535,064
    )
    
    $
    116,083
  27




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As of December 31,(in thousands, except per share data)
    
    2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006Balance Sheet Data:AssetsCash and cash equivalents
    
    $
    177,736
    
    
    $
    299,514
    
    
    $
    280,912
    
    
    $
    242,665
    
    
    $
    204,428Investments
    
    
    288,985
    
    
    
    274,444
    
    
    
    486,870
    
    
    
    617,631
    
    
    
    599,448Restricted cash and investments
    
    
    138,540
    
    
    
    127,116
    
    
    
    
    
    
    
    
    
    
    
    Unrealized gain on swaps, at fair value
    
    
    2,006
    
    
    
    2,207
    
    
    
    
    
    
    
    606
    
    
    
    73,330Other assets
    
    
    27,592
    
    
    
    29,466
    
    
    
    26,449
    
    
    
    27,744
    
    
    
    25,262Total assets
    
    $
    634,859
    
    
    $
    732,747
    
    
    $
    794,231
    
    
    $
    888,646
    
    
    $
    902,468Liabilities and Equity (deficit)Unrealized loss on swaps, at fair value
    
    $
    395,164
    
    
    $
    691,905
    
    
    $
    2,173,461
    
    
    $
    544,731
    
    
    $
    2,931Long-term debt
    
    
    215,828
    
    
    
    244,051
    
    
    
    317,535
    
    
    
    325,904
    
    
    
    325,000Other liabilities
    
    
    21,902
    
    
    
    46,238
    
    
    
    7,670
    
    
    
    12,952
    
    
    
    13,925Total liabilities
    
    $
    632,894
    
    
    $
    982,194
    
    
    $
    2,498,666
    
    
    $
    883,587
    
    
    $
    341,856Equity (deficit)Common shares
    
    $
    3,046
    
    
    $
    3,061
    
    
    $
    3,263
    
    
    $
    3,603
    
    
    $
    3,470Additional paid-in-capital
    
    
    275,453
    
    
    
    280,685
    
    
    
    281,596
    
    
    
    280,224
    
    
    
    269,420Warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    612Accumulated other comprehensive income
(loss)
    
    
    3,333
    
    
    
    2,148
    
    
    
    908
    
    
    
    (4,712
    )
    
    
    (2,375
    )Retained earnings (deficit)
    
    
    (372,969
    )
    
    
    (628,443
    )
    
    
    (2,088,723
    )
    
    
    (372,577
    )
    
    
    190,964Total shareholders equity (deficit)
of Primus Guaranty, Ltd.
    
    
    (91,137
    )
    
    
    (342,549
    )
    
    
    (1,802,956
    )
    
    
    (93,462
    )
    
    
    462,091Preferred securities of subsidiary
    
    $
    93,102
    
    
    $
    93,102
    
    
    $
    98,521
    
    
    $
    98,521
    
    
    $
    98,521Total equity (deficit)
    
    
    1,965
    
    
    
    (249,447
    )
    
    
    (1,704,435
    )
    
    
    5,059
    
    
    
    560,612Total liabilities and equity (deficit)
    
    $
    634,859
    
    
    $
    732,747
    
    
    $
    794,231
    
    
    $
    888,646
    
    
    $
    902,468Per Share Data:Book value per share(1)
    
    $
    (2.39
    )
    
    $
    (8.95
    )
    
    $
    (44.21
    )
    
    $
    (2.08
    )
    
    $
    10.65
 
 (1)
    
    Book value per share is based on total shareholders equity (deficit) of Primus Guaranty,
Ltd. divided by basic common shares outstanding.  28




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##### Table of Contents



Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following is a discussion and analysis of our financial condition and results of
operations. This discussion should be read in conjunction with our consolidated financial
statements and accompanying notes, which appear elsewhere in this Annual Report on Form 10-K . This
discussion 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 elsewhere in this Annual Report on
Form 10-K, particularly in the Risk Factors section and under the heading Cautionary Note
Regarding Forward-Looking Statements. Capitalized and certain other terms used in this discussion
have been defined or construed elsewhere in this Annual Report on Form 10-K .
 Business Introduction
  Primus Financial
       29




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##### Table of Contents



Primus Asset Management
  Executive Overview and Business Outlook
         30




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##### Table of Contents



Critical Accounting Policies
    Valuation of Credit Swaps
  
    
    The contractual terms of the swap contract, which include the Reference Entity, the
notional value, the maturity, the credit swap premium and the currency of the swap.
    
    Current market data, including credit swap premium levels pertinent to each Reference
Entity, estimated recovery rates on Reference Entities, market interest rates, foreign
exchange rates, an estimate of mid-market prices to exit prices, and for tranche
transactions, estimates of the correlation of the underlying Reference Entities within
each tranche transaction.
    
    Valuation models are used to derive a fair value of credit swaps.
    
    Consideration of our own nonperformance risk, as well as the credit risk of credit swap
counterparties. ASC Topic 820, Fair Value Measurements and Disclosures,requires that
nonperformance risk be considered when determining the fair value of credit swaps.
    
    Estimates of fair values of credit swaps from third-party valuation services and/or
credit swap counterparties.
  
    
    For single name credit swaps, the valuation model uses mid-market credit swap premium
data obtained from an independent provider. The independent provider obtains mid-market
credit swap premium quotes from a number of dealers in the credit swap market across a
range of standard maturities and restructuring terms, and computes composite credit swap
premium quotes on specific Reference Entities, where available. When quotes are not
available, management uses observable market data on comparable Reference Entities. The
inputs to the valuation model include: current credit swap premium quotes on the Reference
Entities, estimated recovery rates on each Reference Entity, current interest rates and
foreign exchange rates. We adjust the independent mid-market credit swap premium quotes to
derive estimated exit price valuations.
  31




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##### Table of Contents




    
    For tranche credit swaps, a mid-market valuation is calculated for each tranche
transaction using a tranche valuation model. The inputs to the tranche valuation model
include: current credit swap
premium quotes obtained from an independent provider on the Reference Entities within the
tranche, estimated recovery rates on the Reference Entities within the tranche, current
market interest rates and correlation levels derived from credit swap indices. The
mid-market valuations obtained from the model are adjusted to estimated exit price
valuations.
 
    
    For CDS on ABS, exit price valuations are obtained from an independent provider and
compared against quotes from credit swap counterparties where available.
 Nonperformance Risk Adjustment
 Fair Value Measurements and Disclosures,
  December 31,
    
    
    December 31,2010
    
    
    2009Unrealized loss on credit swaps, at fair
value, without nonperformance risk
adjustments
    
    $
    456,498
    
    
    $
    906,382Nonperformance risk adjustments
    
    
    (61,334
    )
    
    
    (214,477
    )Unrealized loss on credit swaps, at fair
value, after nonperformance risk
adjustments
    
    $
    395,164
    
    
    $
    691,905
  Years Ended December 31,2010
    
    
    2009
    
    
    2008Net credit swap revenue
(loss) without nonperformance
risk adjustments
    
    $
    420,899
    
    
    $
    2,494,940
    
    
    $
    (2,942,487
    )Nonperformance risk adjustments
    
    
    (153,143
    )
    
    
    (1,039,138
    )
    
    
    1,253,615Net credit swap revenue (loss)
after nonperformance risk
adjustments
    
    
    267,756
    
    
    
    1,455,802
    
    
    
    (1,688,872
    )
  32




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##### Table of Contents



Fair Value Hierarchy  Level 3
    Impact of Adoption of ASC Topic 810, Consolidation
 Consolidation
   Contingent Consideration from the Buyer of CypressTree
  Contingent Consideration Payments to the Sellers of CypressTree
   33




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##### Table of Contents



Lehman Brothers Special Financing Inc.
   Results of Operations
 Introduction
       Year Ended December 31, 2010 Compared with Year Ended December 31, 2009
 Overview of Financial Results
   34




---



##### Table of Contents



Net Credit Swap Revenue
   
    
    Net premiums earned;
    
    Net realized gains (losses) on credit swaps, which include gains (losses) on terminated
credit swaps sold and losses on credit events during the period; and
    
    Net unrealized gains (losses) on credit swaps.
  Years EndedDecember 31,2010
    
    
    2009Net premiums earned
    
    $
    58,100
    
    
    $
    85,116Net realized losses on credit swaps
    
    
    (86,884
    )
    
    
    (113,077
    )Net unrealized gains on credit swaps
    
    
    296,540
    
    
    
    1,483,763Total net credit swap revenue
    
    $
    267,756
    
    
    $
    1,455,802
  35




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##### Table of Contents



Net Premiums Earned
  Net Realized Losses on Credit Swaps
   Net Unrealized Gains on Credit Swaps
  Interest Income
   Gain on Retirement of Long-Term Debt
     36




---



##### Table of Contents



Other Income
   Operating Expenses
  Years EndedDecember 31,2010
    
    
    2009Compensation and employee benefits
    
    $
    18,650
    
    
    $
    17,661Professional and legal fees
    
    
    6,718
    
    
    
    6,848Other
    
    
    6,774
    
    
    
    8,507Total operating expenses
    
    $
    32,142
    
    
    $
    33,016Number of full-time employees, at end of period
    
    
    19
    
    
    
    47
    Restructuring Costs
   37




---



##### Table of Contents



Interest Expense and Preferred Distributions
 Interest Expense
     Preferred Distributions
    38




---



##### Table of Contents



Provision (Benefit) for Income Taxes
  Discontinued Operations
   Consolidation,
   Year Ended December 31, 2009 Compared with Year Ended December 31, 2008
 Overview of Financial Results
     39




---



##### Table of Contents



Net Credit Swap Revenue (Loss)
   Years EndedDecember 31,2009
    
    
    2008Primus Financial
    
    $
    1,455,802
    
    
    $
    (1,689,584
    )Harrier Credit Strategies Master Fund, LP
    
    
    
    
    
    
    712Total consolidated net credit swap revenue (loss)
    
    $
    1,455,802
    
    
    $
    (1,688,872
    )
   Net Credit Swap Revenue (Loss)
   
    
    Net premiums earned;
    
    Net realized gains (losses) on credit swaps, which include gains (losses) on terminated
credit swaps sold and losses on credit events during the period; and
    
    Net unrealized gains (losses) on credit swaps.
  40




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##### Table of Contents



Years EndedDecember 31,2009
    
    
    2008Net premiums earned
    
    $
    85,116
    
    
    $
    102,501Net realized gains (losses) on credit swaps
    
    
    (113,077
    )
    
    
    (162,653
    )Net unrealized gains (losses) on credit swaps
    
    
    1,483,763
    
    
    
    (1,629,432
    )Total net credit swap revenue (loss)
    
    $
    1,455,802
    
    
    $
    (1,689,584
    )
 Net Premiums Earned
  Net Realized Gains (Losses) on Credit Swaps
   Net Unrealized Gains (Losses) on Credit Swaps
   Interest Income
   41




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##### Table of Contents



Gain on Retirement of Long-Term Debt
     Other Income (Loss)
  Operating Expenses
  Years EndedDecember 31,2009
    
    
    2008Compensation and employee benefits
    
    $
    17,661
    
    
    $
    14,595Professional and legal fees
    
    
    6,848
    
    
    
    4,331Other
    
    
    8,507
    
    
    
    10,032Total operating expenses
    
    $
    33,016
    
    
    $
    28,958Number of full-time employees, at end of period
    
    
    47
    
    
    
    42
   42




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##### Table of Contents



Interest Expense and Preferred Distributions
 Interest Expense
    Preferred Distributions
  Income Taxes
   43




---



##### Table of Contents



Discontinued Operations
  Income Taxes
   Non-GAAP Financial Measures  Economic Results
  Consolidation,
  
    
    Unrealized gains (losses) on credit swaps sold by Primus Financial are excluded from
GAAP net income (loss) available to common shares;
    
    Realized gains from early termination of credit swaps sold by Primus Financial are
excluded from GAAP net income (loss) available to common shares;
  44




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
    
    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.
    Years Ended December 31,(in thousands, except per share data)
    
    2010
    
    
    2009
    
    
    2008GAAP net income (loss) available to
common shares
    
    $
    255,474
    
    
    $
    1,460,280
    
    
    $
    (1,716,146
    )Adjustments:Change in unrealized fair value of credit
swaps sold (gain) loss by Primus Financial
    
    
    (296,540
    )
    
    
    (1,483,763
    )
    
    
    1,629,432Realized gains from early termination
of credit swaps sold by Primus Financial
    
    
    
    
    
    
    
    
    
    
    (28
    )Amortization of realized gains from
the early termination of credit swaps sold
by Primus Financial
    
    
    810
    
    
    
    1,414
    
    
    
    2,173Provision for CDS on ABS credit events
    
    
    (2,374
    )
    
    
    (16,208
    )
    
    
    (9,328
    )Reduction in provision for CDS on ABS
credit events upon termination of credit
swaps
    
    
    1,819
    
    
    
    34,540
    
    
    
    12,216Economic Results
    
    $
    (40,811
    )
    
    $
    (3,737
    )
    
    $
    (81,681
    )Economic Results earnings (loss) per
GAAP diluted share
    
    $
    (1.01
    )
    
    $
    (0.09
    )
    
    $
    (1.83
    )Economic Results weighted average
common shares outstanding  GAAP diluted
    
    
    40,366
    
    
    
    41,414
    
    
    
    44,722
  45




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Liquidity and Capital Resources
 Capital Strategy
          46




---



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Cash Flows
 Cash flows from operating activities 
  Cash flows from investing activities 
  Cash flows from financing activities
   Off-Balance Sheet Arrangements
   47




---



##### Table of Contents



Contractual Obligations
  Payment due by periodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsProperty leases
    
    $
    7,658
    
    
    $
    2,166
    
    
    $
    2,312
    
    
    $
    2,313
    
    
    $
    8677% Senior Notes
    
    
    90,426
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90,426Interest on 7% Senior Notes (a)
    
    
    160,259
    
    
    
    2,084
    
    
    
    12,660
    
    
    
    12,660
    
    
    
    132,855Subordinated deferrable interest
notes
    
    
    122,800
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    122,800Interest on subordinated
deferrable interest notes (b)
    
    
    63,728
    
    
    
    4,453
    
    
    
    8,917
    
    
    
    8,905
    
    
    
    41,453Total
    
    $
    444,871
    
    
    $
    8,703
    
    
    $
    23,889
    
    
    $
    23,878
    
    
    $
    388,401
 (a)
    
    Net interest payments on the outstanding 7% Senior Notes at December 31, 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 fourth quarter of 2010. The counterparty has the right to terminate the
interest rate swap agreement in December 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 fourth quarter of 2010. Property leases:
   7% Senior Notes and Subordinated deferrable interest notes:
  48




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Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
     49




---



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Item 8.
    
    Financial Statements and Supplementary Data
 Primus Guaranty, Ltd.
Index to Consolidated Financial Statements
 Report of Independent Registered Public Accounting Firm
    
    
    51Managements Report on Internal Control over Financial Reporting
    
    
    52Consolidated Statements of Financial Condition as of December 31, 2010 and 2009
    
    
    53Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008
    
    
    54Consolidated Statements of Shareholders Equity (Deficit) for the
years ended December 31, 2010, 2009 and 2008
    
    
    55Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008
    
    
    56Notes to Consolidated Financial Statements
    
    
    57
   50




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51




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##### Table of Contents



/s/ Richard Claiden
    
    /s/ Christopher N. GerosaRichard Claiden
    
    Christopher N. GerosaChief Executive Officer
    
    Chief Financial Officer
  52




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Primus Guaranty, Ltd.
 
 Consolidated Statements of Financial Condition  (in thousands except share amounts)
 December 31,2010
    
    
    2009AssetsCash and cash equivalents
    
    $
    177,736
    
    
    $
    299,514Investments (includes $288,815 and $274,275 at
fair value as of December 31, 2010 and 2009,
respectively)
    
    
    288,985
    
    
    
    274,444Restricted cash and investments
    
    
    138,540
    
    
    
    127,116Accrued interest and premiums
    
    
    5,860
    
    
    
    6,163Unrealized gain on credit swaps, at fair value
    
    
    2,006
    
    
    
    2,207Goodwill and other intangible assets, net
    
    
    
    
    
    
    8,017Debt issuance costs, net
    
    
    4,072
    
    
    
    4,736Other assets (includes $11,559 and $1,837 at
fair value as of December 31, 2010 and 2009,
respectively)
    
    
    17,660
    
    
    
    10,550Total assets
    
    $
    634,859
    
    
    $
    732,747Liabilities and Equity (deficit)LiabilitiesAccounts payable and accrued expenses
    
    $
    8,701
    
    
    $
    7,855Unrealized loss on credit swaps, at fair value
    
    
    395,164
    
    
    
    691,905Payable for credit events
    
    
    3,447
    
    
    
    28,596Long-term debt
    
    
    215,828
    
    
    
    244,051Restructuring liabilities
    
    
    3,729
    
    
    
    Other liabilities
    
    
    6,025
    
    
    
    9,787Total liabilities
    
    
    632,894
    
    
    
    982,194Equity (deficit)Common shares, $0.08 par value, 62,500,000
shares authorized, 38,078,790 and 38,267,546
shares issued and outstanding at December 31,
2010 and 2009, respectively
    
    
    3,046
    
    
    
    3,061Additional paid-in capital
    
    
    275,453
    
    
    
    280,685Accumulated other comprehensive income
    
    
    3,333
    
    
    
    2,148Retained earnings (deficit)
    
    
    (372,969
    )
    
    
    (628,443
    )Total shareholders equity (deficit) of
Primus Guaranty, Ltd.
    
    
    (91,137
    )
    
    
    (342,549
    )Preferred securities of subsidiary
    
    
    93,102
    
    
    
    93,102Total equity (deficit)
    
    
    1,965
    
    
    
    (249,447
    )Total liabilities and equity (deficit)
    
    $
    634,859
    
    
    $
    732,747
 See accompanying Notes to Consolidated Financial Statements.
  53




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Primus Guaranty, Ltd.
 
 Consolidated Statements of Operations  (in thousands except per share amounts)
 Years Ended December 31,2010
    
    
    2009
    
    
    2008RevenuesNet credit swap revenue (loss)
    
    $
    267,756
    
    
    $
    1,455,802
    
    
    $
    (1,688,872
    )Interest income
    
    
    13,140
    
    
    
    6,685
    
    
    
    25,483Gain on retirement of long-term debt
    
    
    9,866
    
    
    
    43,151
    
    
    
    9,716Other income (loss)
    
    
    3,391
    
    
    
    3,797
    
    
    
    (240
    )Total revenues (losses)
    
    
    294,153
    
    
    
    1,509,435
    
    
    
    (1,653,913
    )ExpensesCompensation and employee benefits
    
    
    18,650
    
    
    
    17,661
    
    
    
    14,595Professional and legal fees
    
    
    6,718
    
    
    
    6,848
    
    
    
    4,331Interest expense
    
    
    7,031
    
    
    
    9,116
    
    
    
    17,032Restructuring costs
    
    
    8,108
    
    
    
    
    
    
    
    Other
    
    
    6,774
    
    
    
    8,507
    
    
    
    10,032Total expenses
    
    
    47,281
    
    
    
    42,132
    
    
    
    45,990Income (loss) from continuing operations before
provision (benefit) for income taxes
    
    
    246,872
    
    
    
    1,467,303
    
    
    
    (1,699,903
    )Provision (benefit) for income taxes
    
    
    (134
    )
    
    
    184
    
    
    
    61Income (loss) from continuing operations, net of tax
    
    
    247,006
    
    
    
    1,467,119
    
    
    
    (1,699,964
    )Loss from discontinued operations, net of tax
    
    
    (49,544
    )
    
    
    (3,422
    )
    
    
    (9,540
    )Net income (loss)
    
    
    197,462
    
    
    
    1,463,697
    
    
    
    (1,709,504
    )Less:Distributions on preferred securities of subsidiary
    
    
    3,162
    
    
    
    3,417
    
    
    
    6,642Net loss from discontinued operations attributable
to non-parent interests in CLOs
    
    
    (61,174
    )
    
    
    
    
    
    
    Net income (loss) available to common shares
    
    $
    255,474
    
    
    $
    1,460,280
    
    
    $
    (1,716,146
    )Income (loss) per common share:Basic:Income (loss) from continuing operations
    
    $
    6.36
    
    
    $
    36.46
    
    
    $
    (38.16
    )Income (loss) from discontinued operations
    
    $
    0.30
    
    
    $
    (0.08
    )
    
    $
    (0.21
    )Net income (loss) available to common shares
    
    $
    6.66
    
    
    $
    36.38
    
    
    $
    (38.37
    )Diluted:Income (loss) from continuing operations
    
    $
    6.04
    
    
    $
    35.34
    
    
    $
    (38.16
    )Income (loss) from discontinued operations
    
    $
    0.29
    
    
    $
    (0.08
    )
    
    $
    (0.21
    )Net income (loss) available to common shares
    
    $
    6.33
    
    
    $
    35.26
    
    
    $
    (38.37
    )Weighted average common shares outstanding:Basic
    
    
    38,361
    
    
    
    40,142
    
    
    
    44,722Diluted
    
    
    40,366
    
    
    
    41,414
    
    
    
    44,722
 See accompanying Notes to Consolidated Financial Statements.
  54




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Primus Guaranty, Ltd.
 
 Consolidated Statements of Shareholders Equity (Deficit)  (in thousands)
 Years Ended December 31,2010
    
    
    2009
    
    
    2008Common sharesBalance at beginning of year
    
    $
    3,061
    
    
    $
    3,263
    
    
    $
    3,603Shares purchased and retired
    
    
    (166
    )
    
    
    (275
    )
    
    
    (359
    )Shares issued under employee compensation plans
    
    
    151
    
    
    
    73
    
    
    
    19Balance at end of year
    
    
    3,046
    
    
    
    3,061
    
    
    
    3,263Additional paid-in-capitalBalance at beginning of year
    
    
    280,685
    
    
    
    281,596
    
    
    
    280,224Shares purchased and retired
    
    
    (13,135
    )
    
    
    (10,150
    )
    
    
    (3,220
    )Shares vested under employee compensation plans
    
    
    7,903
    
    
    
    4,728
    
    
    
    4,592Preferred shares purchased by subsidiary
    
    
    
    
    
    
    4,511
    
    
    
    Balance at end of year
    
    
    275,453
    
    
    
    280,685
    
    
    
    281,596Accumulated other comprehensive income (loss)Balance at beginning of year
    
    
    2,148
    
    
    
    908
    
    
    
    (4,712
    )Foreign currency translation adjustments
    
    
    30
    
    
    
    232
    
    
    
    (447
    )Change in unrealized holding gains on
available-for-sale securities
    
    
    1,155
    
    
    
    1,008
    
    
    
    6,067Balance at end of year
    
    
    3,333
    
    
    
    2,148
    
    
    
    908Retained earnings (deficit)Balance at beginning of year
    
    
    (628,443
    )
    
    
    (2,088,723
    )
    
    
    (372,577
    )Net income (loss)
    
    
    197,462
    
    
    
    1,463,697
    
    
    
    (1,709,504
    )Net loss attributable to non-parent interests in CLOs
    
    
    61,174
    
    
    
    
    
    
    
    Distributions on preferred securities of subsidiary
    
    
    (3,162
    )
    
    
    (3,417
    )
    
    
    (6,642
    )Balance at end of year
    
    
    (372,969
    )
    
    
    (628,443
    )
    
    
    (2,088,723
    )Appropriated retained earnings from CLO consolidationAdoption of ASC Topic 810, Consolidation
    
    
    265,639
    
    
    
    
    
    
    
    Net loss attributable to non-parent interests in CLOs
    
    
    (61,174
    )
    
    
    
    
    
    
    Deconsolidation of CLOs
    
    
    (204,465
    )
    
    
    
    
    
    
    Balance at end of year
    
    
    
    
    
    
    
    
    
    
    Total shareholders equity (deficit) of Primus
Guaranty, Ltd.
    
    
    (91,137
    )
    
    
    (342,549
    )
    
    
    (1,802,956
    )Preferred securities of subsidiaryBalance at beginning of year
    
    
    93,102
    
    
    
    98,521
    
    
    
    98,521Net purchase of preferred shares
    
    
    
    
    
    
    (5,419
    )
    
    
    Balance at end of year
    
    
    93,102
    
    
    
    93,102
    
    
    
    98,521Total equity (deficit) at end of year
    
    $
    1,965
    
    
    $
    (249,447
    )
    
    $
    (1,704,435
    )Comprehensive income (loss)Net income (loss)
    
    $
    197,462
    
    
    $
    1,463,697
    
    
    $
    (1,709,504
    )Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    30
    
    
    
    232
    
    
    
    (447
    )Change in unrealized gains on available-for-sale
investments
    
    
    1,155
    
    
    
    1,008
    
    
    
    6,067Comprehensive income (loss)
    
    
    198,647
    
    
    
    1,464,937
    
    
    
    (1,703,884
    )Less: Distributions on preferred securities of subsidiary
    
    
    3,162
    
    
    
    3,417
    
    
    
    6,642Less: Net loss attributable to non-parent interests in
CLOs
    
    
    (61,174
    )
    
    
    
    
    
    
    Comprehensive income (loss) available to common shares
    
    $
    256,659
    
    
    $
    1,461,520
    
    
    $
    (1,710,526
    )
 See accompanying Notes to Consolidated Financial Statements.
  55




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Primus Guaranty, Ltd.
 
 Consolidated Statements of Cash Flows  (in thousands)
 Years Ended December 31,2010
    
    
    2009
    
    
    2008Cash flows from operating activitiesNet income (loss) available to common shares
    
    $
    255,474
    
    
    $
    1,460,280
    
    
    $
    (1,716,146
    )Net loss attributable to non-parent interests in CLOs
    
    
    (61,174
    )
    
    
    
    
    
    
    Distributions on preferred securities of subsidiary
    
    
    3,162
    
    
    
    3,417
    
    
    
    6,642Net income (loss)
    
    
    197,462
    
    
    
    1,463,697
    
    
    
    (1,709,504
    )Adjustments to reconcile net income (loss) to net cash used
in operating activities:Non-cash items included in net income (loss):CLO net unrealized gains on CLO loans and securities
    
    
    (69,139
    )
    
    
    
    
    
    
    CLO net unrealized losses on CLO notes
    
    
    218,104
    
    
    
    
    
    
    
    CLO net realized gains by the CLOs
    
    
    (56,977
    )
    
    
    
    
    
    
    Depreciation and amortization
    
    
    1,114
    
    
    
    1,250
    
    
    
    1,329Share-based compensation
    
    
    11,169
    
    
    
    4,728
    
    
    
    4,611Net unrealized (gain) loss on credit swap portfolio
    
    
    (296,540
    )
    
    
    (1,483,763
    )
    
    
    1,629,336Net amortization of premium and discount on
securities
    
    
    7,945
    
    
    
    687
    
    
    
    (2,240
    )Gain on retirement of long-term debt
    
    
    (9,866
    )
    
    
    (43,151
    )
    
    
    (9,716
    )Impairment loss on investments
    
    
    
    
    
    
    761
    
    
    
    11,896Other
    
    
    (3,717
    )
    
    
    1,047
    
    
    
    1,408Increase (decrease) in cash resulting from changes in:CLO cash and cash equivalents
    
    
    (45,394
    )
    
    
    
    
    
    
    CLO other assets
    
    
    21,499
    
    
    
    
    
    
    
    CLO other liabilities
    
    
    (398
    )
    
    
    
    
    
    
    CLO proceeds from sale of CLO loans and securities
    
    
    848,643
    
    
    
    
    
    
    
    CLO purchases of CLO loans and securities
    
    
    (817,513
    )
    
    
    
    
    
    
    Restricted cash
    
    
    (4,050
    )
    
    
    (90,610
    )
    
    
    Accrued interest and premiums
    
    
    303
    
    
    
    305
    
    
    
    5,403Other assets
    
    
    (4,646
    )
    
    
    (3,123
    )
    
    
    261Purchases of trading account assets
    
    
    (131,101
    )
    
    
    
    
    
    
    (3,940
    )Sales of trading account assets
    
    
    131,124
    
    
    
    3,940
    
    
    
    Accounts payable and accrued expenses
    
    
    (2,420
    )
    
    
    2,923
    
    
    
    (4,634
    )Payable for credit events
    
    
    (25,149
    )
    
    
    25,410
    
    
    
    3,186Restructuring liabilities
    
    
    3,729
    
    
    
    
    
    
    
    (1,709
    )Other liabilities
    
    
    (1,410
    )
    
    
    2,577
    
    
    
    (2,125
    )Net cash used in operating activities
    
    
    (27,274
    )
    
    
    (113,322
    )
    
    
    (76,438
    )Cash flows from investing activitiesBusiness acquisition, net of cash received
    
    
    (3,427
    )
    
    
    (2,214
    )
    
    
    Fixed asset purchases and capitalized software costs
    
    
    (47
    )
    
    
    (121
    )
    
    
    (702
    )Payments received from investments in CLOs
    
    
    1,224
    
    
    
    94
    
    
    
    3,399Purchases of investments, including restricted investments
    
    
    (206,911
    )
    
    
    (321,596
    )
    
    
    (1,538,046
    )Maturities and sales of available-for-sale investments
    
    
    187,266
    
    
    
    493,399
    
    
    
    1,665,759Net cash provided by (used in) investing activities
    
    
    (21,895
    )
    
    
    169,562
    
    
    
    130,410Cash flows from financing activitiesCLO repayment of CLO notes
    
    
    (37,651
    )
    
    
    
    
    
    
    Retirement of long-term debt
    
    
    (18,676
    )
    
    
    (23,192
    )
    
    
    (5,057
    )Purchase and retirement of common shares
    
    
    (13,150
    )
    
    
    (10,352
    )
    
    
    (3,579
    )Purchase of preferred securities of subsidiary
    
    
    
    
    
    
    (908
    )
    
    
    Net preferred distributions of subsidiary
    
    
    (3,162
    )
    
    
    (3,417
    )
    
    
    (6,642
    )Net cash used in financing activities
    
    
    (72,639
    )
    
    
    (37,869
    )
    
    
    (15,278
    )Net effect of exchange rate changes on cash
    
    
    30
    
    
    
    231
    
    
    
    (447
    )Net increase (decrease) in cash
    
    
    (121,778
    )
    
    
    18,602
    
    
    
    38,247Cash and cash equivalents at beginning of year
    
    
    299,514
    
    
    
    280,912
    
    
    
    242,665Cash and cash equivalents at end of year
    
    $
    177,736
    
    
    $
    299,514
    
    
    $
    280,912Supplemental disclosures of cash flow information:Cash paid for interest
    
    $
    5,709
    
    
    $
    10,159
    
    
    $
    16,897Cash paid for taxes
    
    
    103
    
    
    
    137
    
    
    
    46Supplemental disclosures of CLOs non-cash transactions:Adoption of ASC Topic 810, Consolidation
    
    
    265,639
    
    
    
    
    
    
    
    Deconsolidation of CLOs
    
    
    (204,465
    )
    
    
    
    
    
    
    
 See accompanying Notes to Consolidated Financial Statements.
  56




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##### Table of Contents



Primus Guaranty, Ltd.
 
 Notes to Consolidated Financial Statements
 1. Organization and Business
        57




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 2. Summary of Significant Accounting Policies
 Basis of Presentation
   Reclassifications
  Use of Estimates
  Cash and Cash Equivalents
  Investments
  Restricted Cash and Investments
  Interest Income
   58




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 Other Income (Loss)
  Credit Swaps
   Foreign Currency Translation
  Goodwill and Other Intangible Assets
  Fixed Assets
  Deferred Debt Issuance Costs
  Variable Interest Entities and CLOs
   59




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
     Contingent Consideration from the Buyer of CypressTree
  Income Taxes
  Share-Based Compensation
    60




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  Recent Accounting Pronouncements
 Generally Accepted Accounting Principles
 Fair Value Measurements and Disclosures
(Topic 820)  Improving Disclosures about Fair Value Measurements
 Impact of Adoption of ASC Topic 810, Consolidation
 Consolidation
   61




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 3. Investments
  December 31, 2010Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAvailable-for-sale:Corporate debt securities
    
    $
    284,090
    
    
    $
    3,378
    
    
    $
    (311
    )
    
    $
    287,157ABS bonds
    
    
    1,392
    
    
    
    266
    
    
    
    
    
    
    
    1,658Total available-for-sale
    
    
    285,482
    
    
    
    3,644
    
    
    
    (311
    )
    
    
    288,815Held-to-maturity:Certificate of deposit
    
    
    170
    
    
    
    
    
    
    
    
    
    
    
    170Total held-to-maturity
    
    
    170
    
    
    
    
    
    
    
    
    
    
    
    170Total investments
    
    $
    285,652
    
    
    $
    3,644
    
    
    $
    (311
    )
    
    $
    288,985
 December 31, 2009Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAvailable-for-sale:Corporate debt securities
    
    $
    271,809
    
    
    $
    1,784
    
    
    $
    (662
    )
    
    $
    272,931Collateralized loan obligations
    
    
    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
    62




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  December 31, 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
    
    $
    78,053
    
    
    $
    (311
    )
    
    $
    
    
    
    $
    
    
    
    $
    78,053
    
    
    $
    (311
    )Total
    
    $
    78,053
    
    
    $
    (311
    )
    
    $
    
    
    
    $
    
    
    
    $
    78,053
    
    
    $
    (311
    )
 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
    )
   4. Net Credit Swap Revenue (Loss) and Credit Swap Portfolio
 Overview
   63




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
       64




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  Concentration Risk by Counterparties
   Net Credit Swap Revenue (Loss)
  Years Ended December 31,2010
    
    
    2009
    
    
    2008Net premium earned
    
    $
    58,100
    
    
    $
    85,116
    
    
    $
    102,515Net realized losses on credit swaps
    
    
    (86,884
    )
    
    
    (113,077
    )
    
    
    (161,957
    )Net unrealized gains (losses) on credit swaps
    
    
    296,540
    
    
    
    1,483,763
    
    
    
    (1,629,430
    )Total net credit swap revenue (loss)
    
    $
    267,756
    
    
    $
    1,455,802
    
    
    $
    (1,688,872
    )
  Credit Events and Terminations of Credit Swaps
  Years Ended December 31,2010
    
    
    2009
    
    
    2008Net realized losses on single name credit swaps
    
    $
    (40,281
    )
    
    $
    (68,590
    )
    
    $
    (150,469
    )Net realized losses on CDS on ABS
    
    
    (4,597
    )
    
    
    (34,540
    )
    
    
    (12,216
    )Net realized losses on tranche
    
    
    (42,006
    )
    
    
    (9,947
    )
    
    
    Total net realized losses
    
    $
    (86,884
    )
    
    $
    (113,077
    )
    
    $
    (162,685
    )
   65




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
    Lehman Brothers Special Financing Inc.
   Credit Swap Portfolio Information
   66




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 December 31, 2010
    
    
    December 31, 2009Notional
    
    
    Fair
    
    
    Notional
    
    
    FairRating Category
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueBy Single Name Reference
Entity/TrancheCredit Swaps Sold-Single Name:AAA
    
    $
    55,143
    
    
    $
    (144
    )
    
    $
    347,963
    
    
    $
    (5,765
    )AA
    
    
    1,137,217
    
    
    
    (8,776
    )
    
    
    1,449,137
    
    
    
    (7,442
    )A
    
    
    2,831,049
    
    
    
    (8,407
    )
    
    
    5,656,180
    
    
    
    (11,217
    )BBB
    
    
    1,946,885
    
    
    
    (1,094
    )
    
    
    4,730,878
    
    
    
    (8,438
    )BB
    
    
    231,167
    
    
    
    (359
    )
    
    
    598,908
    
    
    
    (16,584
    )B
    
    
    66,691
    
    
    
    (886
    )
    
    
    189,284
    
    
    
    (2,726
    )CCC
    
    
    40,000
    
    
    
    (638
    )
    
    
    85,000
    
    
    
    (8,864
    )CC
    
    
    
    
    
    
    
    
    
    
    213,087
    
    
    
    (106,143
    )D
    
    
    
    
    
    
    
    
    
    
    41,000
    
    
    
    (21,868
    )Non rated
    
    
    302,819
    
    
    
    (57,286
    )
    
    
    56,482
    
    
    
    (628
    )Total
    
    $
    6,610,971
    
    
    $
    (77,590
    )
    
    $
    13,367,919
    
    
    $
    (189,675
    )Credit Swaps Sold-Tranche:AAA
    
    $
    2,650,000
    
    
    $
    (168,627
    )
    
    $
    1,575,000
    
    
    $
    (120,112
    )AA
    
    
    450,000
    
    
    
    (49,035
    )
    
    
    1,275,000
    
    
    
    (122,406
    )A
    
    
    300,000
    
    
    
    (30,390
    )
    
    
    
    
    
    
    BBB
    
    
    300,000
    
    
    
    (22,193
    )
    
    
    750,000
    
    
    
    (103,601
    )BB
    
    
    50,000
    
    
    
    (5,175
    )
    
    
    100,000
    
    
    
    (12,997
    )B
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    (17,373
    )CCC
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    (45,393
    )C
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    (53,802
    )Non rated
    
    
    43,317
    
    
    
    (19,373
    )
    
    
    
    
    
    
    Total
    
    $
    3,793,317
    
    
    $
    (294,793
    )
    
    $
    4,100,000
    
    
    $
    (475,684
    )CDS on ABS:BBB
    
    $
    736
    
    
    $
    (358
    )
    
    $
    3,682
    
    
    $
    (2,880
    )B
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    (4,357
    )CCC
    
    
    18,000
    
    
    
    (15,794
    )
    
    
    13,000
    
    
    
    (10,534
    )CC
    
    
    5,000
    
    
    
    (4,683
    )
    
    
    10,000
    
    
    
    (8,989
    )Total
    
    $
    23,736
    
    
    $
    (20,835
    )
    
    $
    31,682
    
    
    $
    (26,760
    )
  67




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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 December 31, 2010
    
    
    December 31, 2009Notional
    
    
    Fair
    
    
    Notional
    
    
    FairRating Category
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueBy Single Name Reference
Entity/TrancheCredit Swaps Purchased-Single Name:A
    
    $
    (4,120
    )
    
    $
    60
    
    
    $
    (4,120
    )
    
    $
    25CC
    
    
    
    
    
    
    
    
    
    
    (4,040
    )
    
    
    2,396Total
    
    $
    (4,120
    )
    
    $
    60
    
    
    $
    (8,160
    )
    
    $
    2,421By Counterparty Buyer / (Seller)Credit Swaps Sold-Single Name:AA
    
    $
    1,675,212
    
    
    $
    (5,970
    )
    
    $
    3,263,322
    
    
    $
    (25,340
    )A
    
    
    4,935,759
    
    
    
    (71,620
    )
    
    
    8,888,189
    
    
    
    (136,293
    )Non rated
    
    
    
    
    
    
    
    
    
    
    1,216,408
    
    
    
    (28,042
    )Total
    
    $
    6,610,971
    
    
    $
    (77,590
    )
    
    $
    13,367,919
    
    
    $
    (189,675
    )Credit Swaps Sold-Tranche:AA
    
    $
    1,843,317
    
    
    $
    (147,723
    )
    
    $
    1,850,000
    
    
    $
    (199,745
    )A
    
    
    1,500,000
    
    
    
    (98,034
    )
    
    
    1,800,000
    
    
    
    (210,057
    )BBB
    
    
    450,000
    
    
    
    (49,036
    )
    
    
    450,000
    
    
    
    (65,882
    )Total
    
    $
    3,793,317
    
    
    $
    (294,793
    )
    
    $
    4,100,000
    
    
    $
    (475,684
    )CDS on ABS:A
    
    $
    23,736
    
    
    $
    (20,835
    )
    
    $
    26,682
    
    
    $
    (22,380
    )Non rated
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    (4,380
    )Total
    
    $
    23,736
    
    
    $
    (20,835
    )
    
    $
    31,682
    
    
    $
    (26,760
    )Credit Swaps Purchased-Single Name:A
    
    $
    (4,120
    )
    
    $
    60
    
    
    $
    (8,160
    )
    
    $
    2,421Total
    
    $
    (4,120
    )
    
    $
    60
    
    
    $
    (8,160
    )
    
    $
    2,421
  68




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  December 31, 2010
    
    
    December 31, 2009Notional
    
    
    Fair
    
    
    Notional
    
    
    FairDomicile
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueCredit Swaps Sold-Single NameBy Reference Entity:North America
    
    $
    2,429,477
    
    
    $
    (57,512
    )
    
    $
    6,836,087
    
    
    $
    (161,513
    )Europe
    
    
    3,834,494
    
    
    
    (17,814
    )
    
    
    5,869,832
    
    
    
    (24,249
    )Asia-Pacific
    
    
    317,000
    
    
    
    (2,065
    )
    
    
    522,000
    
    
    
    (3,714
    )Others
    
    
    30,000
    
    
    
    (199
    )
    
    
    140,000
    
    
    
    (199
    )Total
    
    $
    6,610,971
    
    
    $
    (77,590
    )
    
    $
    13,367,919
    
    
    $
    (189,675
    )By Counterparty:North America
    
    $
    2,649,509
    
    
    $
    (13,665
    )
    
    $
    6,359,144
    
    
    $
    (76,784
    )Europe
    
    
    3,924,462
    
    
    
    (63,603
    )
    
    
    6,891,775
    
    
    
    (111,894
    )Asia-Pacific
    
    
    37,000
    
    
    
    (322
    )
    
    
    117,000
    
    
    
    (997
    )Total
    
    $
    6,610,971
    
    
    $
    (77,590
    )
    
    $
    13,367,919
    
    
    $
    (189,675
    )Credit Swaps Sold -TrancheBy Counterparty:North America
    
    $
    600,000
    
    
    $
    (31,442
    )
    
    $
    600,000
    
    
    $
    (47,099
    )Europe
    
    
    3,193,317
    
    
    
    (263,351
    )
    
    
    3,500,000
    
    
    
    (428,585
    )Total
    
    $
    3,793,317
    
    
    $
    (294,793
    )
    
    $
    4,100,000
    
    
    $
    (475,684
    )CDS on ABSBy Reference Entity:North America
    
    $
    23,736
    
    
    $
    (20,835
    )
    
    $
    31,682
    
    
    $
    (26,760
    )Total
    
    $
    23,736
    
    
    $
    (20,835
    )
    
    $
    31,682
    
    
    $
    (26,760
    )By Counterparty:North America
    
    $
    13,736
    
    
    $
    (12,038
    )
    
    $
    21,682
    
    
    $
    (18,830
    )Europe
    
    
    10,000
    
    
    
    (8,797
    )
    
    
    10,000
    
    
    
    (7,930
    )Total
    
    $
    23,736
    
    
    $
    (20,835
    )
    
    $
    31,682
    
    
    $
    (26,760
    )Credit Swaps Purchased-Single NameBy Reference Entity:North America
    
    $
    (4,120
    )
    
    $
    60
    
    
    $
    (8,160
    )
    
    $
    2,421Total
    
    $
    (4,120
    )
    
    $
    60
    
    
    $
    (8,160
    )
    
    $
    2,421By Counterparty:Europe
    
    $
    (4,120
    )
    
    $
    60
    
    
    $
    (8,160
    )
    
    $
    2,421Total
    
    $
    (4,120
    )
    
    $
    60
    
    
    $
    (8,160
    )
    
    $
    2,421
  69




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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  December 31, 2010
    
    
    December 31, 2009Notional
    
    
    Fair
    
    
    Notional
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueCredit Swaps Sold-Single NameYear of Maturity2010
    
    $
    
    
    
    $
    
    
    
    $
    5,435,860
    
    
    $
    (24,057
    )2011
    
    
    2,261,170
    
    
    
    (57,836
    )
    
    
    2,510,612
    
    
    
    (101,066
    )2012
    
    
    3,659,132
    
    
    
    (22,212
    )
    
    
    4,394,718
    
    
    
    (69,285
    )2013
    
    
    690,669
    
    
    
    2,458
    
    
    
    1,026,729
    
    
    
    4,733Total
    
    $
    6,610,971
    
    
    $
    (77,590
    )
    
    $
    13,367,919
    
    
    $
    (189,675
    )Credit Swaps Sold-TrancheYear of Maturity2012
    
    $
    375,000
    
    
    $
    (5,117
    )
    
    $
    375,000
    
    
    $
    (13,350
    )2013
    
    
    93,317
    
    
    
    (24,548
    )
    
    
    200,000
    
    
    
    (71,175
    )2014
    
    
    3,325,000
    
    
    
    (265,128
    )
    
    
    3,525,000
    
    
    
    (391,159
    )Total
    
    $
    3,793,317
    
    
    $
    (294,793
    )
    
    $
    4,100,000
    
    
    $
    (475,684
    )CDS on ABSEstimated Year of Maturity2010
    
    $
    
    
    
    $
    
    
    
    $
    10,000
    
    
    $
    (8,989
    )2011
    
    
    18,000
    
    
    
    (16,000
    )
    
    
    16,682
    
    
    
    (14,199
    )2012
    
    
    5,000
    
    
    
    (4,477
    )
    
    
    5,000
    
    
    
    (3,572
    )2020
    
    
    736
    
    
    
    (358
    )
    
    
    
    
    
    
    Total
    
    $
    23,736
    
    
    $
    (20,835
    )
    
    $
    31,682
    
    
    $
    (26,760
    )Credit Swaps Purchased-Single
NameYear of Maturity2014
    
    $
    (4,120
    )
    
    $
    60
    
    
    $
    (8,160
    )
    
    $
    2,421Total
    
    $
    (4,120
    )
    
    $
    60
    
    
    $
    (8,160
    )
    
    $
    2,421
  70




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 5. Financial Instruments and Fair Value Disclosures
    
    
    Level 1  Valuations based on unadjusted quoted prices in active markets for identical
assets or liabilities.Cash and cash equivalents, which include deposits in banks, money market accounts and
money market funds, are categorized within Level 1.
    
    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.Corporate debt securities and the interest rate swap are categorized within Level 2 of the
fair value hierarchy. The interest rate swap is included in other assets in the consolidated
statements of financial condition.
    
    Level 3  Valuations based on significant unobservable inputs that are supported by
little or no market activity.
   71




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  Valuation Techniques  Credit Swaps
  
    
    The contractual terms of the swap contract, which include the Reference Entity, the
notional value, the maturity, the credit swap premium and the currency of the swap.
    
    Current market data, including credit swap premium levels pertinent to each Reference
Entity, estimated recovery rates on Reference Entities, market interest rates, foreign
exchange rates, an estimate of mid-market prices to exit prices, and for tranche
transactions, estimates of the correlation of the underlying Reference Entities within
each tranche transaction.
    
    Valuation models are used to derive a fair value of credit swaps.
    
    Consideration of the Companys own nonperformance risk, as well as the credit risk of
credit swap counterparties. ASC Topic 820, Fair Value Measurements and Disclosures,
requires that nonperformance risk be considered when determining the fair value of credit
swaps.
    
    Estimates of fair values of credit swaps from third-party valuation services and/or
credit swap counterparties.
  
    
    For single name credit swaps, the valuation model uses mid-market credit swap premium
data obtained from an independent provider. The independent provider obtains mid-market
credit swap premium quotes from a number of dealers in the credit swap market across a
range of standard maturities and restructuring terms, and computes composite credit swap
premium quotes on specific Reference Entities, where available. When quotes are not
available, management uses observable market data on comparable Reference Entities. The
inputs to the valuation model include: current credit swap premium quotes on the Reference
Entities, estimated recovery rates on each Reference Entity, current interest rates and
foreign exchange rates. The Company adjusts the independent mid-market credit swap premium
quotes to derive exit price valuations.
 
    
    For tranche credit swaps, a mid-market valuation is calculated for each tranche
transaction using a tranche valuation model. The inputs to the tranche valuation model
include: current credit swap premium quotes obtained from an independent provider on the
Reference Entities within the tranche, estimated recovery rates on the Reference Entities
within the tranche, current market interest rates and correlation levels derived from
credit swap indices. The mid-market valuations obtained from the model are adjusted to
estimated exit price valuations.
 
    
    For CDS on ABS, exit price valuations are obtained from an independent provider and
compared against quotes from credit swap counterparties where available.
  72




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 
 Valuation Techniques  Other Financial Instruments
  
    
    For cash and cash equivalents, which include deposits in banks, money market accounts
and money market funds, the fair value of these instruments is based upon quoted market
prices. The Company does not adjust the quoted price for such instruments.
 
    
    For U.S. government agency obligations, commercial paper and corporate debt securities,
the fair value is based upon observable quoted market prices and benchmarked to
third-party quotes.
 
    
    For the interest rate swap, the fair value is based upon observable market data
including contractual terms, market prices and interest rates and is benchmarked to a
third-party quote.
 
    
    For the ABS, the fair value is based upon a valuation from an independent valuation
service, which estimates the value of the bond by utilizing a valuation model. This model
incorporates projected cash flows, utilizing default, prepayment, recovery and interest
rate assumptions.
 
    
    For the investments in securities issued by CLOs, the fair value is based upon a
valuation model which includes observable inputs, where available. The model calculates
the present value of expected cash flows using estimates of key portfolio assumptions,
including forecasted credit losses, prepayment rates, forward yield curves and discount
rates commensurate with the risk involved.
 
    
    For the contingent consideration from the buyer of CypressTree, the contingent
consideration to the sellers of CypressTree and the Companys investments in securities
issued by CLOs, the fair value is based upon a valuation model which discounts the
projected future cash fees and distributions for each CLO. Significant inputs to the
valuation model include the fee structure of the CLO, estimates related to loan default
rates, recoveries, discount rates and an estimate of the risk of forfeiture of collateral
management.
 Nonperformance Risk Adjustment
 Fair Value Measurements and Disclosures,
  December 31,
    
    
    December 31,2010
    
    
    2009Unrealized loss on credit swaps, at fair
value, without nonperformance risk
adjustments
    
    $
    456,498
    
    
    $
    906,382Nonperformance risk adjustments
    
    
    (61,334
    )
    
    
    (214,477
    )Unrealized loss on credit swaps, at fair
value, after nonperformance risk
adjustments
    
    $
    395,164
    
    
    $
    691,905
  73




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  Years Ended December 31,2010
    
    
    2009
    
    
    2008Net credit swap revenue (loss)
without nonperformance risk
adjustments
    
    $
    420,899
    
    
    $
    2,494,940
    
    
    $
    (2,942,487
    )Nonperformance risk adjustments
    
    
    (153,143
    )
    
    
    (1,039,138
    )
    
    
    1,253,615Net credit swap revenue (loss)
after nonperformance risk
adjustments
    
    $
    267,756
    
    
    $
    1,455,802
    
    
    $
    (1,688,872
    )
  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
    
    $
    177,736
    
    
    $
    
    
    
    $
    
    
    
    $
    177,736Investments
    
    
    
    
    
    
    287,157
    
    
    
    1,658
    
    
    
    288,815Restricted investments
    
    
    
    
    
    
    
    
    
    
    6,114
    
    
    
    6,114Unrealized gain on credit swaps
    
    
    
    
    
    
    
    
    
    
    2,006
    
    
    
    2,006Other assets
    
    
    
    
    
    
    2,602
    
    
    
    8,957
    
    
    
    11,559Total Assets
    
    $
    177,736
    
    
    $
    289,759
    
    
    $
    18,735
    
    
    $
    486,230LiabilitiesUnrealized loss on credit swaps
    
    $
    
    
    
    $
    
    
    
    $
    395,164
    
    
    $
    395,164Other liabilities
    
    
    
    
    
    
    
    
    
    
    5,148
    
    
    
    5,148Total Liabilities
    
    $
    
    
    
    $
    
    
    
    $
    400,312
    
    
    $
    400,312
  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
  74




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 Level 3 Assets and Liabilities Reconciliation Tables
 Level 3 Assets
  Year Ended
    
    
    Year EndedDecember 31, 2010
    
    
    December 31, 2009Unrealized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    UnrealizedGain on
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain onCredit
    
    
    
    
    
    
    Restricted
    
    
    
    
    
    
    CreditSwaps
    
    
    Investments
    
    
    Investments
    
    
    Other Assets
    
    
    Swaps
    
    
    InvestmentsBalance, beginning
of period
    
    $
    2,207
    
    
    $
    1,344
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    4,736Realized gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,063Unrealized gains
(losses)
    
    
    (201
    )
    
    
    452
    
    
    
    6,114
    
    
    
    
    
    
    
    2,207
    
    
    
    1,056Purchases, sales,
issuances
and settlements
    
    
    
    
    
    
    (138
    )
    
    
    
    
    
    
    8,957
    
    
    
    
    
    
    
    (6,511
    )Balance, end of
period
    
    $
    2,006
    
    
    $
    1,658
    
    
    $
    6,114
    
    
    $
    8,957
    
    
    $
    2,207
    
    
    $
    1,344
      75




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 Level 3 Liabilities
  Year Ended
    
    
    Year EndedDecember 31, 2010
    
    
    December 31, 2009Unrealized
    
    
    
    
    
    
    UnrealizedLoss on
    
    
    Other
    
    
    Loss on
    
    
    OtherCredit Swaps
    
    
    Liabilities
    
    
    Credit Swaps
    
    
    LiabilitiesBalance, beginning of period
    
    $
    (691,905
    )
    
    $
    (5,470
    )
    
    $
    (2,173,461
    )
    
    $
    Realized losses
    
    
    86,884
    
    
    
    
    
    
    
    113,077
    
    
    
    Unrealized gains (losses)
    
    
    209,857
    
    
    
    322
    
    
    
    1,368,479
    
    
    
    (2,828
    )Purchases, sales, issuances and settlements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,642
    )Balance, end of period
    
    $
    (395,164
    )
    
    $
    (5,148
    )
    
    $
    (691,905
    )
    
    $
    (5,470
    )
   Financial Instruments Not Carried at Fair Value
    76




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 Fair Value Option
 Financial Instruments, Financial Instruments, Financial Instruments,
  6. CypressTree Acquisition and Subsequent Divestiture
 Acquisition
    Business Combinations Intangibles  Goodwill and Other
  77




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 Divestiture
   7. Discontinued Operations
  Consolidation,
   78




---



##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  Consideration from buyer:Contingent consideration from buyer
    
    $
    9,092Receivable from buyer
    
    
    294Total consideration from buyer
    
    
    9,386Net assets sold or written-off:Investment in securities issued by CLO
    
    
    (204
    )Goodwill
    
    
    (3,922
    )Intangible assets, net
    
    
    (3,537
    )Total net assets sold or written-off 2012
    
    
    (7,663
    )Transaction costs
    
    
    (1,610
    )Gain on sale of CypressTree
    
    $
    113
  Years Ended December 31,2010
    
    
    2009
    
    
    2008RevenuesAsset management and advisory fees
    
    $
    12,396
    
    
    $
    4,561
    
    
    $
    3,427Interest income
    
    
    1,225
    
    
    
    62
    
    
    
    1,103Impairment loss on investments
    
    
    
    
    
    
    (761
    )
    
    
    (11,896
    )Other income (loss)
    
    
    8,396
    
    
    
    
    
    
    
    Gain on sale of CypressTree
    
    
    113
    
    
    
    
    
    
    
    Net CLO loss
    
    
    (91,427
    )
    
    
    
    
    
    
    CLO interest income, net
    
    
    48,256
    
    
    
    
    
    
    
    Total revenues
    
    
    (21,041
    )
    
    
    3,862
    
    
    
    (7,366
    )ExpensesCompensation and employee benefits
    
    
    4,046
    
    
    
    2,544
    
    
    
    1,775Professional and legal fees
    
    
    565
    
    
    
    835
    
    
    
    Restructuring costs
    
    
    3,862
    
    
    
    
    
    
    
    Other
    
    
    2,047
    
    
    
    3,904
    
    
    
    399CLO expenses
    
    
    18,003
    
    
    
    
    
    
    
    Total expenses
    
    
    28,523
    
    
    
    7,283
    
    
    
    2,174Loss before provision (benefit) for income
taxes and loss attributable to non-parent
interests in CLOs
    
    
    (49,564
    )
    
    
    (3,421
    )
    
    
    (9,540
    )Provision (benefit) for income taxes
    
    
    (20
    )
    
    
    1
    
    
    
    Loss from discontinuing operations, net of tax
    
    
    (49,544
    )
    
    
    (3,422
    )
    
    
    (9,540
    )Loss from discontinued operations
attributable to non-parent interests in CLOs
    
    
    (61,174
    )
    
    
    
    
    
    
    Income (loss) attributable to common shares
    
    $
    11,630
    
    
    $
    (3,422
    )
    
    $
    (9,540
    )
  79




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  8. Restructuring
   9. Fixed Assets
  December 31,2010
    
    
    2009Asset categoryFurniture and fixtures
    
    $
    20
    
    
    $
    1,247Computers
    
    
    140
    
    
    
    1,049Office and telephone equipment
    
    
    4
    
    
    
    192Leasehold improvements
    
    
    
    
    
    
    2,043164
    
    
    
    4,531Less accumulated depreciation and amortization
    
    
    71
    
    
    
    2,693Total fixed assets
    
    $
    93
    
    
    $
    1,838
   80




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 10. Long-Term Debt
  December 31,2010
    
    
    2009Primus Guaranty, Ltd. issuer:7% Senior Notes, due 2036
    
    $
    90,426
    
    
    $
    94,613Fair value adjustment of interest rate swap related to hedged debt
    
    
    2,602
    
    
    
    1,838Primus Financial issuer:$125 million Subordinated Deferrable Interest Notes, due 2021
    
    
    76,600
    
    
    
    97,300$75 million Subordinated Deferrable Interest Notes, due 2034
    
    
    46,200
    
    
    
    50,300Total long-term debt
    
    $
    215,828
    
    
    $
    244,051
  Years Ended December 31,2010
    
    
    2009
    
    
    20087% Senior Notes, due 2036:Principal purchased
    
    $
    4,187
    
    
    $
    15,109
    
    
    $
    15,278Cost of purchase and retirement of debt
    
    
    (2,986
    )
    
    
    (6,438
    )
    
    
    (5,057
    )Write-off of unamortized issuance costs
    
    
    (133
    )
    
    
    (498
    )
    
    
    (505
    )Net gain on retirement of long-term debt
    
    
    1,068
    
    
    
    8,173
    
    
    
    9,716$125 million Subordinated Deferrable Interest
Notes, due 2021:Principal purchased
    
    $
    20,700
    
    
    $
    27,700
    
    
    $
    Cost of purchase and retirement of debt
    
    
    (13,239
    )
    
    
    (8,208
    )
    
    
    Write-off of unamortized issuance costs
    
    
    (256
    )
    
    
    (342
    )
    
    
    Net gain on retirement of long-term debt
    
    
    7,205
    
    
    
    19,150
    
    
    
    $75 million Subordinated Deferrable Interest
Notes, due 2034:Principal purchased
    
    $
    4,100
    
    
    $
    24,700
    
    
    $
    Cost of purchase and retirement of debt
    
    
    (2,451
    )
    
    
    (8,548
    )
    
    
    Write-off of unamortized issuance costs
    
    
    (56
    )
    
    
    (324
    )
    
    
    Net gain on retirement of long-term debt
    
    
    1,593
    
    
    
    15,828
    
    
    
    Total net gain on retirement of long-term debt
    
    $
    9,866
    
    
    $
    43,151
    
    
    $
    9,716
  81




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 7% Senior Notes
  $125 million Subordinated Deferrable Interest Notes
  $75 million Subordinated Deferrable Interest Notes
    11. Income Taxes
   82




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
       Years Ended December 31,2010
    
    
    2009
    
    
    2008Current:Federal
    
    $
    4
    
    
    $
    36
    
    
    $
    State/City
    
    
    (16
    )
    
    
    39
    
    
    
    50Foreign
    
    
    (122
    )
    
    
    109
    
    
    
    11Total current
    
    
    (134
    )
    
    
    184
    
    
    
    61Deferred:Federal
    
    
    
    
    
    
    
    
    
    
    State/City
    
    
    
    
    
    
    
    
    
    
    Foreign
    
    
    
    
    
    
    
    
    
    
    Total deferred
    
    
    
    
    
    
    
    
    
    
    Total provision (benefit) for income taxes
    
    $
    (134
    )
    
    $
    184
    
    
    $
    61
  83




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
   Years Ended December 31,2010
    
    
    2009
    
    
    2008U.S. federal income tax provision on
Primus Asset Managements taxable income
    
    $
    4
    
    
    $
    36
    
    
    $
    U.S. state and local tax provision
    
    
    (16
    )
    
    
    39
    
    
    
    50Foreign
    
    
    (122
    )
    
    
    109
    
    
    
    11Total provision (benefit) for income taxes
    
    $
    (134
    )
    
    $
    184
    
    
    $
    61
    December 31,2010
    
    
    2009Deferred tax assetsCapitalized and pre-operating formation costs
    
    $
    
    
    
    $
    12Share-based compensation
    
    
    3,253
    
    
    
    4,657Net operating losses
    
    
    10,274
    
    
    
    5,275Depreciation
    
    
    1,023
    
    
    
    410Other
    
    
    2,997
    
    
    
    3,597Gross deferred tax asset
    
    
    17,547
    
    
    
    13,951Deferred tax liabilityOther
    
    
    1,028
    
    
    
    1,296Gross deferred tax liability
    
    
    1,028
    
    
    
    1,296Net deferred tax asset
    
    
    16,519
    
    
    
    12,655Valuation allowance
    
    
    (16,519
    )
    
    
    (12,655
    )Net deferred tax asset after valuation allowance
    
    $
    
    
    
    $
    
  84




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  December 31,2010
    
    
    2009Balance at beginning of period
    
    $
    12,655
    
    
    $
    9,830Capitalized and pre-operating costs
    
    
    (12
    )
    
    
    12Share-based compensation
    
    
    (1,404
    )
    
    
    542Tax depreciation / other
    
    
    281
    
    
    
    2,539Net operating loss
    
    
    4,999
    
    
    
    (268
    )Balance at end of period
    
    $
    16,519
    
    
    $
    12,655
   12. Preferred Securities of Subsidiary
     13. Shareholders Equity
   85




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 14. Earnings per Share
  Years Ended December 31,(in thousands, except per share data)
    
    2010
    
    
    2009
    
    
    2008Income (loss) from continuing operations, net of tax
    
    $
    247,006
    
    
    $
    1,467,119
    
    
    $
    (1,699,964
    )Loss from discontinued operations, net of tax
    
    
    (49,544
    )
    
    
    (3,422
    )
    
    
    (9,540
    )Net income (loss)
    
    
    197,462
    
    
    
    1,463,697
    
    
    
    (1,709,504
    )Less:Distributions on preferred securities of subsidiary
    
    
    3,162
    
    
    
    3,417
    
    
    
    6,642Net loss from discontinued operations attributable
to non-parent interests in CLOs
    
    
    (61,174
    )
    
    
    
    
    
    
    Net income (loss) available to common shares
    
    $
    255,474
    
    
    $
    1,460,280
    
    
    $
    (1,716,146
    )Income (loss) per common share:Basic:Income (loss) from continuing operations
    
    $
    6.36
    
    
    $
    36.46
    
    
    $
    (38.16
    )Income (loss) from discontinued operations
    
    $
    0.30
    
    
    $
    (0.08
    )
    
    $
    (0.21
    )Net income (loss) available to common shares
    
    $
    6.66
    
    
    $
    36.38
    
    
    $
    (38.37
    )Diluted:Income (loss) from continuing operations
    
    $
    6.04
    
    
    $
    35.34
    
    
    $
    (38.16
    )Income (loss) from discontinued operations
    
    $
    0.29
    
    
    $
    (0.08
    )
    
    $
    (0.21
    )Net income (loss) available to common shares
    
    $
    6.33
    
    
    $
    35.26
    
    
    $
    (38.37
    )Weighted average common shares outstanding:Basic
    
    
    38,361
    
    
    
    40,142
    
    
    
    44,722Effect of dilutive instruments:Restricted share units
    
    
    2,005
    
    
    
    1,272
    
    
    
    Diluted
    
    
    40,366
    
    
    
    41,414
    
    
    
    44,722
  15. Commitments and Contingencies
 Leases
   86




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
   2011
    
    $
    2,1662012
    
    
    1,1562013
    
    
    1,1562014
    
    
    1,1562015
    
    
    1,1572016 and thereafter
    
    
    867Total
    
    $
    7,658
  16. Employee Share-Based Compensation Plans
   Years Ended December 31,2010
    
    
    2009
    
    
    2008Share units
    
    $
    5,561
    
    
    $
    3,290
    
    
    $
    3,503Performance shares
    
    
    877
    
    
    
    743
    
    
    
    (291
    )Share options
    
    
    323
    
    
    
    512
    
    
    
    1,002Total
    
    $
    6,761
    
    
    $
    4,545
    
    
    $
    4,214
  Incentive Compensation Plan
   87




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  Performance Shares
   Years Ended December 31,2010
    
    
    2009Risk free interest rate
    
    
    0.20
    %
    
    
    1.25
    %Volatility
    
    
    74
    %
    
    
    198
    %Contractual share term
    
    
    3 years
    
    
    
    3 yearsWeighted average fair value of options
    
    $
    2.76
    
    
    $
    1.56
  WeightedAverageNumber
    
    
    Grant dateof
    
    
    Fair ValueShares
    
    
    *Unvested at December 31, 2009
    
    
    225,000
    
    
    $
    1.56Granted
    
    
    410,011
    
    
    $
    2.76Vested
    
    
    (361,668
    )
    
    $
    2.08Forfeited
    
    
    (34,266
    )
    
    $
    2.67Unvested at December 31, 2010 *
    
    
    239,077
    
    
    $
    4.10
 *
    
    During the fourth quarter of 2010 the Company classified performance shares using the
share based liability method for accounting. As of December 31, 2010, the Company used a Monte
Carlo simulation model to estimate the fair value of the unvested performance shares at $4.10 per
share. The following assumptions for the unvested performance grants at December 31, 2010 were
used: risk free interest rate of 0.8%, volatility of 47.3% and contractual remaining performance share
term of 2.1 years.  88




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 Share Units
   WeightedAverageNumber
    
    
    Grant dateof
    
    
    Fair ValueShares
    
    
    *Unvested at December 31, 2009
    
    
    2,547,509
    
    
    $
    2.70Granted
    
    
    1,050,612
    
    
    $
    3.40Vested
    
    
    (2,879,592
    )
    
    $
    2.95Forfeited
    
    
    (13,041
    )
    
    $
    2.45Unvested at December 31, 2010 *
    
    
    705,488
    
    
    $
    5.08
 *
    
    During the fourth quarter of 2010 the Company classified share units using the share
based liability method for accounting. The unvested share units had a weighted average fair value
of $5.08 per share as of December 31, 2010. Share Options
    2010
    
    
    2009
    
    
    2008Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber
    
    
    Average
    
    
    Number
    
    
    Average
    
    
    Number
    
    
    Averageof
    
    
    Exercise
    
    
    of
    
    
    Exercise
    
    
    of
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at
beginning of year
    
    
    884,564
    
    
    $
    11.45
    
    
    
    1,225,549
    
    
    $
    11.59
    
    
    
    1,311,624
    
    
    $
    11.61Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (31,875
    )
    
    $
    11.25
    
    
    
    (340,985
    )
    
    $
    11.97
    
    
    
    (86,075
    )
    
    $
    11.88Outstanding at end of year
    
    
    852,689
    
    
    $
    11.45
    
    
    
    884,564
    
    
    $
    11.45
    
    
    
    1,225,549
    
    
    $
    11.59Exercisable at end of year
    
    
    827,689
    
    
    $
    11.44
    
    
    
    644,908
    
    
    $
    11.29
    
    
    
    621,451
    
    
    $
    11.32
  89




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  Options Outstanding
    
    
    Options ExercisableAverage
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedNumber
    
    
    Remaining
    
    
    Average
    
    
    Aggregate
    
    
    Number
    
    
    Average
    
    
    AggregateRange of Exercise
    
    of
    
    
    Contractual
    
    
    Exercise
    
    
    Intrinsic
    
    
    of
    
    
    Exercise
    
    
    IntrinsicPrices
    
    Shares
    
    
    Life (Years)
    
    
    Price
    
    
    Value
    
    
    Shares
    
    
    Price
    
    
    Value$6.94
    
    
    63,125
    
    
    
    1.1
    
    
    $
    6.94
    
    
    
    
    
    
    
    63,125
    
    
    $
    6.94
    
    
    
    $9.76
    
    
    110,000
    
    
    
    1.9
    
    
    $
    9.76
    
    
    
    
    
    
    
    110,000
    
    
    $
    9.76
    
    
    
    $9.77 - $13.50
    
    
    679,564
    
    
    
    1.1
    
    
    $
    12.15
    
    
    
    
    
    
    
    654,564
    
    
    $
    12.16
    
    
    
    Total
    
    
    852,689
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    827,689
    
    
    
    
    
    
    
    
  17. Dividend Restrictions
   18. Interest Rate Swap Agreement
  19. Subsequent Events
    90




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 20. Quarterly Operating Results
 (unaudited)
 (in thousands)First
    
    
    Second
    
    
    Third
    
    
    Fourth2010:
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterTotal net revenues (losses)
    
    $
    196,362
    
    
    $
    (288,783
    )
    
    $
    227,401
    
    
    $
    148,040Operating income (loss)
    
    
    176,923
    
    
    
    (313,604
    )
    
    
    205,404
    
    
    
    130,275Net income (loss)
available to common shares
    
    
    86,522
    
    
    
    (188,394
    )
    
    
    229,027
    
    
    
    128,319Basic earnings (loss)
available to common shares
    
    $
    2.24
    
    
    $
    (4.84
    )
    
    $
    6.02
    
    
    $
    6.66Diluted earnings (loss)
available to common shares
    
    $
    2.15
    
    
    $
    (4.84
    )
    
    $
    5.72
    
    
    $
    6.33
 (in thousands)First
    
    
    Second
    
    
    Third
    
    
    Fourth2009:
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterTotal net revenues
    
    $
    118,747
    
    
    $
    608,982
    
    
    $
    475,514
    
    
    $
    310,054Operating income
    
    
    107,894
    
    
    
    598,003
    
    
    
    462,274
    
    
    
    295,711Net income
available to common
shares
    
    
    106,808
    
    
    
    596,928
    
    
    
    461,543
    
    
    
    295,001Basic earnings
available to common
shares
    
    $
    2.61
    
    
    $
    14.76
    
    
    $
    11.54
    
    
    $
    7.51Diluted earnings
available to common
shares
    
    $
    2.61
    
    
    $
    14.46
    
    
    $
    11.14
    
    
    $
    7.21
  91




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 Fourth Quarter 2010 Discussion
   21. Primus Guaranty, Ltd.  Standalone Financial Statements
 Primus Guaranty, Ltd.
Statements of Financial Condition
 December 31,(in thousands)
    
    2010
    
    
    2009AssetsCash and cash equivalents
    
    $
    19,439
    
    
    $
    12,513Available-for-sale investments
    
    
    4,251
    
    
    
    26,004Accrued interest receivable
    
    
    57
    
    
    
    320Prepaid expenses
    
    
    
    
    
    
    1,629Intercompany receivable
    
    
    2,565
    
    
    
    1,098Intercompany loans
    
    
    11,541
    
    
    
    11,742Debt issuance costs, net
    
    
    2,735
    
    
    
    2,976Other assets
    
    
    2,603
    
    
    
    2,893Total assets
    
    $
    43,191
    
    
    $
    59,175Liabilities and shareholders equityAccounts payable and accrued expenses
    
    $
    340
    
    
    $
    232Long-term debt
    
    
    93,028
    
    
    
    96,451Intercompany payable
    
    
    1,255
    
    
    
    341Losses of subsidiaries in excess of investments
    
    
    39,705
    
    
    
    304,700Total liabilities
    
    
    134,328
    
    
    
    401,724Common shares
    
    
    3,046
    
    
    
    3,061Additional paid-in-capital
    
    
    275,453
    
    
    
    280,685Accumulated other comprehensive income
    
    
    3,333
    
    
    
    2,148Retained earnings (deficit)
    
    
    (372,969
    )
    
    
    (628,443
    )Total shareholders equity (deficit)
    
    
    (91,137
    )
    
    
    (342,549
    )Total liabilities and shareholders equity
    
    $
    43,191
    
    
    $
    59,175
  92




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 Standalone Financial Statements
Primus Guaranty, Ltd.
Statements of Operations
 Years Ended December 31,(in thousands)
    
    2010
    
    
    2009
    
    
    2008RevenuesInterest income
    
    $
    993
    
    
    $
    1,001
    
    
    $
    2,285Intercompany revenue *
    
    
    11,722
    
    
    
    
    
    
    
    Intercompany interest income
    
    
    996
    
    
    
    984
    
    
    
    1,014Gain on retirement of long-term debt
    
    
    1,068
    
    
    
    8,174
    
    
    
    9,716Other income, net
    
    
    1,455
    
    
    
    18
    
    
    
    Total revenues
    
    
    16,234
    
    
    
    10,177
    
    
    
    13,015ExpensesIntercompany expenses **
    
    
    6,796
    
    
    
    5,239
    
    
    
    4,761Share compensation
    
    
    400
    
    
    
    317
    
    
    
    371Interest expense
    
    
    2,278
    
    
    
    2,974
    
    
    
    6,874Professional and legal fees
    
    
    3,125
    
    
    
    2,820
    
    
    
    1,288Other
    
    
    1,146
    
    
    
    398
    
    
    
    705Total expenses
    
    
    13,745
    
    
    
    11,748
    
    
    
    13,999Income (loss) before equity in earnings (loss) of
subsidiaries
    
    
    2,489
    
    
    
    (1,571
    )
    
    
    (984
    )Equity in earnings (loss) of subsidiaries, net of tax
    
    
    252,985
    
    
    
    1,461,851
    
    
    
    (1,715,162
    )Net income (loss)
    
    $
    255,474
    
    
    $
    1,460,280
    
    
    $
    (1,716,146
    )
 *
    
    Charges billed to subsidiaries for allocated expenses incurred.**
    
    Charges for services provided by subsidiaries under modified intercompany service agreement.  93




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 Standalone Financial Statements
 Primus Guaranty, Ltd.
Statements of Cash Flows
 Years Ended December 31,(in thousands)
    
    2010
    
    
    2009
    
    
    2008Cash flows from operating activities:Net income (loss)
    
    $
    255,474
    
    
    $
    1,460,280
    
    
    $
    (1,716,146
    )Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:Share-based compensation
    
    
    7,903
    
    
    
    4,728
    
    
    
    4,611Amortization of debt issuance costs
    
    
    107
    
    
    
    113
    
    
    
    143Net amortization of premium and discount on securities
    
    
    367
    
    
    
    131
    
    
    
    (218
    )Change in accumulated comprehensive (income) loss of
subsidiaries
    
    
    1,076
    
    
    
    (236
    )
    
    
    4,792Gain on retirement of long-term debt
    
    
    (1,068
    )
    
    
    (8,173
    )
    
    
    (9,716
    )Equity in subsidiaries (earnings) loss, net of tax
    
    
    (252,985
    )
    
    
    (1,461,851
    )
    
    
    1,715,162Increase (decrease) in cash resulting from changes in:Intercompany receivables/payables and loans
    
    
    (352
    )
    
    
    (204
    )
    
    
    2,403Accrued interest receivable
    
    
    263
    
    
    
    76
    
    
    
    (396
    )Prepaid expenses and other assets
    
    
    2,685
    
    
    
    (1,167
    )
    
    
    (1,081
    )Accounts payable and accrued expenses
    
    
    108
    
    
    
    (213
    )
    
    
    22Net cash provided by (used in) operating activities
    
    
    13,578
    
    
    
    (6,516
    )
    
    
    (424
    )Cash flows from investing activities:Purchases of available-for-sale investments
    
    
    (7,849
    )
    
    
    (20,566
    )
    
    
    (28,861
    )Maturities and sales of available-for-sale investments
    
    
    29,344
    
    
    
    17,154
    
    
    
    6,567Net return from (investment in) subsidiaries
    
    
    (12,011
    )
    
    
    (3,679
    )
    
    
    3,808Net cash provided by (used in) investing activities
    
    
    9,484
    
    
    
    (7,091
    )
    
    
    (18,486
    )Cash flows from financing activities:Payments for retirement of long-term debt
    
    
    (2,986
    )
    
    
    (6,437
    )
    
    
    (5,057
    )Purchase and retirement of common shares
    
    
    (13,150
    )
    
    
    (10,352
    )
    
    
    (3,579
    )Net cash used in financing activities
    
    
    (16,136
    )
    
    
    (16,789
    )
    
    
    (8,636
    )Net increase (decrease) in cash
    
    
    6,926
    
    
    
    (30,396
    )
    
    
    (27,546
    )Cash and cash equivalents at beginning of year
    
    
    12,513
    
    
    
    42,909
    
    
    
    70,455Cash and cash equivalents at end of year
    
    $
    19,439
    
    
    $
    12,513
    
    
    $
    42,909
  94




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##### Table of Contents



Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
  
 Item 9A.
    
    Controls and Procedures
     
 Item 9B.
    
    Other Information
   
 Part III.
 
 Item 10.
    
    Directors, Executive Officers and Corporate Governance
  Paul S. Giordano
  95




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Robert R. Lusardi
 John A. Ward, III
       96




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##### Table of Contents



Item 11.
    
    Executive Compensation
  
 Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters
 Securities Authorized for Issuance under Equity Compensation Plans
  (c)(b)
    
    
    Number of Securities(a)
    
    
    Weighted-Average
    
    
    Remaining Available forNumber of Securities to be
    
    
    Exercise Price of
    
    
    Future Issuance Under EquityIssued upon Exercise of
    
    
    Outstanding
    
    
    Compensation PlansOutstanding Options,
    
    
    Options, Warrants
    
    
    (Excluding SecuritiesPlan Category
    
    Warrants and Rights
    
    
    and Rights
    
    
    Reflected in Column (a)Share Awards(1) (2)
    
    
    1,025,514Options
    
    
    852,689
    
    
    $
    11.45Total
    
    
    1,878,203
    
    
    
    
    
    
    
    4,824,672
 (1)
    
    Includes share units and performance shares, assuming target performance.(2)
    
    Includes 80,948 shares issued to directors in March 2011, as compensation for their board service for 2010.  
 Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
  
 Item 14.
    
    Principal Accountant Fees and Services
   97




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##### Table of Contents



Part IV.
 
 Item. 15
    
    Exhibits and Financial Statement Schedules
        Number
    
    Exhibit3.1
    
    Memorandum of Association (Incorporated by reference to Exhibit 3.1 to Form S-1/A
dated July 23, 2004)3.2
    
    Bye-laws (Incorporated by reference to Exhibit 3.2 to Form S-1/A dated June 10, 2004)4.1
    
    Specimen Common Share Certificate (Incorporated by reference to Exhibit 4.1 to Form
S-1/A dated July 23, 2004)4.2
    
    Senior Indenture dated as of December 27, 2006 between Primus Guaranty, Ltd. and the
Trustee (Incorporated by reference to Exhibit 4.1 to Form 8-K filed on December 27,
2006)4.3
    
    First Supplemental Indenture dated as of December 27, 2006 between Primus Guaranty,
Ltd. and the Trustee (Incorporated by reference to Exhibit 4.2 to Form 8-K filed on
December 27, 2006)4.4
    
    Form of 7% Senior Notes due 2036 (Incorporated by reference to Exhibit 4.2 to Form
8-K filed on December 27, 2006)4.5
    
    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)4.6
    
    Amendment No. 1, dated as of December 30, 2010, to the Rights Agreement, dated as of
May 29, 2009, between Primus Guaranty, Ltd. and Mellon Investor Services LLC, as
rights agent (incorporated by reference to Exhibit 4.1 to Form 8-K filed on December
30, 2010)10.1
    
    Separation Agreement, dated October 29, 2010, between Thomas W. Jasper and Primus
Asset Management, Inc. (Incorporated by reference to Exhibit 10.4 to Form 10-Q filed
on November 12, 2010)10.2
    
    Employment Letter with Richard Claiden, dated February 2, 2011 (Filed herewith)10.3
    
    Employment Letter with Christopher N. Gerosa, dated February 2, 2011 (Filed herewith)10.4
    
    Employment Letter with Vincent B. Tritto, dated February 2, 2011 (Filed herewith)10.5
    
    Form of Registration Rights Agreement by and among the Registrant and the
signatories thereto (Incorporated by reference to Exhibit 10.4 to Form S-1/A dated
June 10, 2004)10.6
    
    Primus Guaranty, Ltd. Share Incentive Plan (Incorporated by reference to Exhibit
10.5 to Form S-1 dated April 26, 2004)
  98




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##### Table of Contents



Number
    
    Exhibit10.7
    
    Primus Guaranty, Ltd. 2004 Share Incentive Plan (Incorporated by reference to
Exhibit 10.5 to Form 10-K filed on March 14, 2008)10.8
    
    Primus Guaranty, Ltd. Annual Performance Bonus Plan (Incorporated by reference to
Exhibit 10.7 to Form S-1 dated April 26, 2004)10.9
    
    Form of Letter Agreement of Primus Guaranty, Ltd. Long-Term Incentive Award for
2011-2014 Performance Share, (Filed herewith)10.10
    
    Office Lease Agreement, dated July 25, 2002, between Madison 45 LLC and Primus
Financial Products, LLC (Incorporated by reference to Exhibit 10.9 to Form S-1 dated
April 26, 2004)10.11
    
    New Sublease and Termination of Prior Sublease Agreement, dated December 21,2010,
between Primus Financial Products, LLC and Seaport Group Leasing, LLC (Filed
herewith)10.12
    
    Form of Indemnification Agreement between Primus Guaranty, Ltd. and each of its
directors and officers (Filed herewith)10.13
    
    Indemnification Agreement, dated September 22, 2004, between Primus Guaranty, Ltd.
and XL Capital Ltd. (Incorporated by reference to Exhibit 10.12 to Form S-1/A dated
September 24, 2004)10.14
    
    Primus Guaranty, Ltd. Restricted Share Unit Deferral Plan (As amended and restated
effective as of July 29, 2010) (Incorporated by reference to Exhibit 10.1 to Form
10-Q filed on November 12, 2010)10.15
    
    Primus Guaranty, Ltd. Incentive Compensation Plan (Filed herewith)10.16
    
    Termination Agreement, dated September 27, 2010, by and among Primus Financial
Products, LLC, Lehman Brothers Holdings Inc. (Incorporated by reference to Exhibit
10.3 to Form 10-Q filed on November 12, 2010)10.17
    
    Shareholders Agreement, dated as of December 30, 2010, by and among Primus Guaranty,
Ltd., Merced Partners Limited Partnership, Merced Partners III (Cayman), L.P. and
EBF & Associates, L.P. (Incorporated by reference to Exhibit 10.1 to Form 8-K filed
on December 30, 2010)12
    
    Ratio of Earnings to Combined Fixed Charges and Preferred Share Dividend Requirements21
    
    Subsidiaries of Primus Guaranty, Ltd.23
    
    Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm31.1
    
    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
  99




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##### Table of Contents



SIGNATURES
  PRIMUS GUARANTY, LTD.
(Registrant)By:
    /s/ Richard ClaidenRichard ClaidenChief Executive Officer  Power of Attorney
   Signature
    
    Title
    
    Date/s/ Richard Claiden

Richard Claiden
    
    Chief Executive Officer and Director
(Principal Executive Officer)
    
    March 31, 2011/s/ Christopher N. Gerosa

Christopher N. Gerosa
    
    Chief Financial Officer
(Principal Financial and
Accounting Officer)
    
    March 31, 2011/s/ Michael P. Esposito, Jr.

Michael P. Esposito, Jr.
    
    Director and Chairman of the Board
    
    March 31, 2011/s/ Frank P. Filipps

Frank P. Filipps
    
    Director
    
    March 31, 2011/s/ Paul S. Giordano

Paul S. Giordano
    
    Director
    
    March 31, 2011/s/ Thomas J. Hartlage

Thomas J. Hartlage
    
    Director
    
    March 31, 2011/s/ Robert R. Lusardi

Robert R. Lusardi
    
    Director
    
    March 31, 2011/s/ James H. MacNaughton

James H. MacNaughton
    
    Director
    
    March 31, 2011/s/ Michael M. Sullivan

Michael M. Sullivan
    
    Director
    
    March 31, 2011/s/ Vincent Vertin

Vincent Vertin
    
    Director
    
    March 31, 2011/s/ John A. Ward, III

John A. Ward, III
    
    Director
    
    March 31, 2011
  100




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##### Table of Contents



Exhibit Index
 Number
    
    Exhibit3.1
    
    Memorandum of Association (Incorporated by reference to Exhibit 3.1 to Form S-1/A
dated July 23, 2004)3.2
    
    Bye-laws (Incorporated by reference to Exhibit 3.2 to Form S-1/A dated June 10, 2004)4.1
    
    Specimen Common Share Certificate (Incorporated by reference to Exhibit 4.1 to Form
S-1/A dated July 23, 2004)4.2
    
    Senior Indenture dated as of December 27, 2006 between Primus Guaranty, Ltd. and the
Trustee (Incorporated by reference to Exhibit 4.1 to Form 8-K filed on December 27,
2006)4.3
    
    First Supplemental Indenture dated as of December 27, 2006 between Primus Guaranty,
Ltd. and the Trustee (Incorporated by reference to Exhibit 4.2 to Form 8-K filed on
December 27, 2006)4.4
    
    Form of 7% Senior Notes due 2036 (Incorporated by reference to Exhibit 4.2 to Form
8-K filed on December 27, 2006)4.5
    
    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)4.6
    
    Amendment No. 1, dated as of December 30, 2010, to the Rights Agreement, dated as of
May 29, 2009, between Primus Guaranty, Ltd. and Mellon Investor Services LLC, as
rights agent (incorporated by reference to Exhibit 4.1 to Form 8-K filed on December
30, 2010)10.1
    
    Separation Agreement, dated October 29, 2010, between Thomas W. Jasper and Primus
Asset Management, Inc. (Incorporated by reference to Exhibit 10.4 to Form 10-Q filed
on November 12, 2010)10.2
    
    Employment Letter with Richard Claiden, dated February 2, 2011 (Filed herewith)10.3
    
    Employment Letter with Christopher N. Gerosa, dated February 2, 2011 (Filed herewith)10.4
    
    Employment Letter with Vincent B. Tritto, dated February 2, 2011 (Filed herewith)10.5
    
    Form of Registration Rights Agreement by and among the Registrant and the
signatories thereto (Incorporated by reference to Exhibit 10.4 to Form S-1/A dated
June 10, 2004)10.6
    
    Primus Guaranty, Ltd. Share Incentive Plan (Incorporated by reference to Exhibit
10.5 to Form S-1 dated April 26, 2004)10.7
    
    Primus Guaranty, Ltd. 2004 Share Incentive Plan (Incorporated by reference to
Exhibit 10.5 to Form 10-K filed on March 14, 2008)10.8
    
    Primus Guaranty, Ltd. Annual Performance Bonus Plan (Incorporated by reference to
Exhibit 10.7 to Form S-1 dated April 26, 2004)10.9
    
    Form of Letter Agreement of Primus Guaranty, Ltd. Long-Term Incentive Award for
2011-2014 Performance Share, (Filed herewith)10.10
    
    Office Lease Agreement, dated July 25, 2002, between Madison 45 LLC and Primus
Financial Products, LLC (Incorporated by reference to Exhibit 10.9 to Form S-1 dated
April 26, 2004)10.11
    
    New Sublease and Termination of Prior Sublease Agreement, dated December 21,2010,
between Primus Financial Products, LLC and Seaport Group Leasing, LLC (Filed
herewith)10.12
    
    Form of Indemnification Agreement between Primus Guaranty, Ltd. and each of its
directors and officers (Filed herewith)10.13
    
    Indemnification Agreement, dated September 22, 2004, between Primus Guaranty, Ltd.
and XL Capital Ltd. (Incorporated by reference to Exhibit 10.12 to Form S-1/A dated
September 24, 2004)10.14
    
    Primus Guaranty, Ltd. Restricted Share Unit Deferral Plan (As amended and restated
effective as of July 29, 2010) (Incorporated by reference to Exhibit 10.1 to Form
10-Q filed on November 12, 2010)10.15
    
    Primus Guaranty, Ltd. Incentive Compensation Plan (Filed herewith)10.16
    
    Termination Agreement, dated September 27, 2010, by and among Primus Financial
Products, LLC, Lehman Brothers Holdings Inc. (Incorporated by reference to Exhibit
10.3 to Form 10-Q filed on November 12, 2010)10.17
    
    Shareholders Agreement, dated as of December 30, 2010, by and among Primus Guaranty,
Ltd., Merced Partners Limited Partnership, Merced Partners III (Cayman), L.P. and
EBF & Associates, L.P. (Incorporated by reference to Exhibit 10.1 to Form 8-K filed
on December 30, 2010)12
    
    Ratio of Earnings to Combined Fixed Charges and Preferred Share Dividend Requirements21
    
    Subsidiaries of Primus Guaranty, Ltd.23
    
    Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm31.1
    
    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
  101