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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, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to .
 Commission File Number: 001-32307
 
 Primus Guaranty, Ltd.
  Bermuda
    
    98-0402357(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 Clarendon House
2 Church Street
Hamilton HM 11, Bermuda
 441-296-0519
 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 (Do not check if a smaller reporting company)
Smaller reporting company o o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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Primus Guaranty, Ltd.
Form 10-K
For the fiscal year ended December 31, 2009
 INDEX
 PagePart I.Item 1.
    
    Business
    
    
    3Item 1A.
    
    Risk Factors
    
    
    17Item 1B.
    
    Unresolved Staff Comments
    
    
    25Item 2.
    
    Properties
    
    
    25Item 3.
    
    Legal Proceedings
    
    
    26Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    26Part II.Item 5.
    
    Market for Registrants Common Equity, Related Shareholder Matters and
Issuer Purchases of Equity Securities
    
    
    26Item 6.
    
    Selected Financial Data
    
    
    29Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    31Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    58Item 8.
    
    Financial Statements and Supplementary Data
    
    
    59Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
    
    
    108Item 9A.
    
    Controls and Procedures
    
    
    108Item 9B.
    
    Other Information
    
    
    108Part III.Item 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    108Item 11.
    
    Executive Compensation
    
    
    109Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters
    
    
    109Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    109Item 14.
    
    Principal Accountant Fees and Services
    
    
    109Part IV.Item 15.
    
    Exhibits and Financial Statement Schedules
    
    
    110Signatures
    
    
    112Exhibit 12Exhibit 21Exhibit 23Exhibit 31.1Exhibit 31.2Exhibit 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. alone or collectively
with its wholly owned subsidiary, CypressTree Investment Management, LLC; (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 Asset Management
   Primus Financial
     4




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Bankruptcy Remoteness
  Credit Swap Portfolio-Primus Financial
     5




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Counterparties
   6




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Primus Guaranty (UK)
  Primus Re
  Other Subsidiaries
  Risk Management Policies and Oversight
  Regulation
  Investments and Investment Policy
   7




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Technology
  Competition
  Employees
  Additional Information
 www.primusguaranty.com
  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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The Bermuda Insurance Act.
  9




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Primus Re, Ltd. Act 2000.
 Notification by shareholder controller of new or increased control.
 Objection to existing shareholder controller.
 TAX CONSIDERATIONS
   10




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Taxation of Shareholders
 Bermuda Taxation
  U.S. Taxation
  U.S. Holders
   Passive Foreign Investment Companies
  11




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12




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www.primusguaranty.com.
      13




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Alternative Characterizations.
  Non-U.S. Holders
  Taxation of Primus Guaranty and Its Subsidiaries
 Bermuda Taxation
 Primus Guaranty, Primus Bermuda and Primus Re.
  14




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U.S. Taxation
 Primus Guaranty, Primus Bermuda, Primus Financial and PGUK.
      15




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Primus Asset Management.
   Primus Re.
  16




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Personal Holding Company Tax and Accumulated Earnings Tax.
 Backup Withholding
 
 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, the demand for our services 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.
   17




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We face risks in Primus Financials credit protection business from concentrations in its
single name credit swaps sold on issuers in certain industries.
     Primus Financials counterparties are primarily global financial institutions and major credit
swap dealers. Some of these institutions have been under stress which has impacted their balance
sheets, capital ratios and ratings and many have had to raise large amounts of new capital. A
default by a major counterparty could have a material adverse impact on Primus Financial.
   18




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Primus Financials tranche portfolio of credit swaps also creates risks for us.
  As a result of the disruption in the credit markets, management has changed its strategy to
amortize Primus Financials credit swap portfolio and to emphasize our credit asset management
expertise by expanding our asset management activities and developing a new credit protection
platform as a replacement for our credit protection business. There can be no assurance that our
new business plan will be successful.
       19




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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.
     We may have difficulty in servicing our outstanding debt.
  We may require additional capital in the future, which may not be available on favorable terms
or at all.
   20




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We depend on a limited number of key employees. If we are not able to retain key employees or
attract new employees in the future, we may be unable to operate our business successfully.
  Variations in market credit swap premiums and correlation levels could cause our financial
results to be volatile.
  Certain of our principal shareholders control us.
   21




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Our rights plan may have anti-takeover effects that could prevent a change of control.
  The commercial and investment activities of some of our principal shareholders and directors
may compete with our business.
  There can be no assurance that funds will be available to pay cash dividends on our common
shares.
  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.
   22




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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.
  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.
   23




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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 .
   24




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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.
  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
    25




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Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 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, 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
 Year ended December 31, 2008
    
    High
    
    
    Low
    
    
    CloseFirst Quarter
    
    $
    7.06
    
    
    $
    2.97
    
    
    $
    3.58Second Quarter
    
    $
    6.00
    
    
    $
    2.90
    
    
    $
    2.91Third Quarter
    
    $
    5.40
    
    
    $
    1.92
    
    
    $
    2.62Fourth Quarter
    
    $
    3.95
    
    
    $
    0.30
    
    
    $
    1.14
  26




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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 (b)October 1 - 31
    
    
    232,125
    
    
    $
    3.72
    
    
    
    232,125
    
    
    $
    15,939,319November 1 - 30
    
    
    185,092
    
    
    $
    3.44
    
    
    
    185,092
    
    
    $
    15,302,603December 1 - 31(a)
    
    
    1,052,876
    
    
    $
    3.20
    
    
    
    1,052,876
    
    
    $
    11,933,400Total
    
    
    1,470,093
    
    
    $
    3.31
    
    
    
    1,470,093
 (a)
    
    During December 2009, approximately 1.0 million shares were acquired in a negotiated
transaction.(b)
    
    On October 8, 2008, our board of directors authorized the implementation of a buyback program
for the purchase of our common shares and/or the 7% Senior Notes in the aggregate up to $25.0
million. The amounts in this column do not reflect the cost of approximately $11.5 million for
purchases of our 7% Senior Notes, since inception of our buyback program through the year ended
December 31, 2009.  Securities Authorized for Issuance under Equity Compensation Plans
 
 Shareholder Information
  Dividend and Distribution Information
    27




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Performance Graph
  
 Cumulative Total Return12/31/04
    
    
    12/31/05
    
    
    12/31/06
    
    
    12/31/07
    
    
    12/31/08
    
    
    12/31/09Primus Guaranty, Ltd.
    
    $
    100.00
    
    
    $
    79.62
    
    
    $
    70.46
    
    
    $
    42.76
    
    
    $
    6.96
    
    
    $
    18.61S&P Small Cap 600 Index
    
    $
    100.00
    
    
    $
    107.68
    
    
    $
    123.96
    
    
    $
    123.59
    
    
    $
    85.19
    
    
    $
    106.98Russell 1000 Financial Sector
    
    $
    100.00
    
    
    $
    106.76
    
    
    $
    126.69
    
    
    $
    105.34
    
    
    $
    51.73
    
    
    $
    61.82
  28




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Item 6. Selected Financial Data
  Years Ended December 31,(in thousands, except per share data)
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005Statements of Operations Data:Revenues:Net credit swap revenue (loss) (1)
    
    $
    1,455,802
    
    
    $
    (1,688,872
    )
    
    $
    (535,064
    )
    
    $
    116,083
    
    
    $
    23,106Asset management and advisory fees
    
    
    5,118
    
    
    
    4,052
    
    
    
    3,481
    
    
    
    1,263
    
    
    
    190Interest income
    
    
    6,747
    
    
    
    26,586
    
    
    
    41,847
    
    
    
    28,374
    
    
    
    16,047Gain on retirement of long-term debt
    
    
    43,151
    
    
    
    9,716
    
    
    
    
    
    
    
    
    
    
    
    Impairment loss on investments
    
    
    (761
    )
    
    
    (11,896
    )
    
    
    
    
    
    
    
    
    
    
    Other income
    
    
    3,240
    
    
    
    (865
    )
    
    
    (2,796
    )
    
    
    2,144
    
    
    
    (1,141
    )Total revenues (losses)
    
    $
    1,513,297
    
    
    $
    (1,661,279
    )
    
    $
    (492,532
    )
    
    $
    147,864
    
    
    $
    38,202Expenses:Compensation and employee benefits
    
    $
    20,205
    
    
    $
    16,370
    
    
    $
    22,450
    
    
    $
    21,512
    
    
    $
    15,935Interest expense
    
    
    9,116
    
    
    
    17,032
    
    
    
    20,729
    
    
    
    10,849
    
    
    
    2,660Other expenses
    
    
    20,094
    
    
    
    14,762
    
    
    
    20,210
    
    
    
    14,887
    
    
    
    11,613Total expenses
    
    $
    49,415
    
    
    $
    48,164
    
    
    $
    63,389
    
    
    $
    47,248
    
    
    $
    30,208Income (loss) before provision for income
taxes
    
    $
    1,463,882
    
    
    $
    (1,709,443
    )
    
    $
    (555,921
    )
    
    $
    100,616
    
    
    $
    7,994Provision for income tax
    
    
    185
    
    
    
    61
    
    
    
    52
    
    
    
    42
    
    
    
    46Net income (loss)
    
    $
    1,463,697
    
    
    $
    (1,709,504
    )
    
    $
    (555,973
    )
    
    $
    100,574
    
    
    $
    7,948Distributions on preferred securities of
subsidiary
    
    $
    3,417
    
    
    $
    6,642
    
    
    $
    7,568
    
    
    $
    5,683
    
    
    $
    3,865Net income (loss) available to common
shares
    
    $
    1,460,280
    
    
    $
    (1,716,146
    )
    
    $
    (563,541
    )
    
    $
    94,891
    
    
    $
    4,083Basic earnings (loss) per share
    
    $
    36.38
    
    
    $
    (38.37
    )
    
    $
    (12.58
    )
    
    $
    2.19
    
    
    $
    0.09Diluted earnings (loss) per share
    
    $
    35.26
    
    
    $
    (38.37
    )
    
    $
    (12.58
    )
    
    $
    2.13
    
    
    $
    0.09Weighted average number of common shares
outstanding:Basic
    
    
    40,142
    
    
    
    44,722
    
    
    
    44,808
    
    
    
    43,306
    
    
    
    43,150Diluted
    
    
    41,414
    
    
    
    44,722
    
    
    
    44,808
    
    
    
    44,472
    
    
    
    44,645(1) Net credit swap revenue (loss)
consists of the following:Net premiums earned
    
    $
    85,116
    
    
    $
    102,515
    
    
    $
    84,771
    
    
    $
    69,408
    
    
    $
    52,705Net realized gains (losses) on credit swaps
    
    
    (113,077
    )
    
    
    (161,957
    )
    
    
    (5,190
    )
    
    
    (1,769
    )
    
    
    (5,162
    )Net unrealized gains (losses) on credit
swaps
    
    
    1,483,763
    
    
    
    (1,629,430
    )
    
    
    (614,645
    )
    
    
    48,444
    
    
    
    (24,437
    )Total net credit swap revenue (loss)
    
    $
    1,455,802
    
    
    $
    (1,688,872
    )
    
    $
    (535,064
    )
    
    $
    116,083
    
    
    $
    23,106
 29




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As of December 31,(in thousands, except per share data)
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005Balance Sheet Data:AssetsCash and cash equivalents
    
    $
    299,514
    
    
    $
    280,912
    
    
    $
    242,665
    
    
    $
    204,428
    
    
    $
    69,355Investments
    
    
    274,444
    
    
    
    486,870
    
    
    
    617,631
    
    
    
    599,448
    
    
    
    560,147Restricted cash and investments
    
    
    127,116
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unrealized gain on swaps, at fair value
    
    
    2,207
    
    
    
    
    
    
    
    606
    
    
    
    73,330
    
    
    
    25,342Fixed assets and software costs, net
    
    
    1,838
    
    
    
    3,308
    
    
    
    5,036
    
    
    
    5,510
    
    
    
    4,993Other assets
    
    
    27,628
    
    
    
    23,141
    
    
    
    22,708
    
    
    
    19,752
    
    
    
    13,245Total assets
    
    $
    732,747
    
    
    $
    794,231
    
    
    $
    888,646
    
    
    $
    902,468
    
    
    $
    673,082Liabilities and Equity (deficit)Unrealized loss on swaps, at fair value
    
    $
    691,905
    
    
    $
    2,173,461
    
    
    $
    544,731
    
    
    $
    2,931
    
    
    $
    3,521Long-term debt
    
    
    244,051
    
    
    
    317,535
    
    
    
    325,904
    
    
    
    325,000
    
    
    
    200,000Other liabilities
    
    
    46,238
    
    
    
    7,670
    
    
    
    12,952
    
    
    
    13,925
    
    
    
    9,189Total liabilities
    
    $
    982,194
    
    
    $
    2,498,666
    
    
    $
    883,587
    
    
    $
    341,856
    
    
    $
    212,710Equity (deficit)Common shares
    
    $
    3,061
    
    
    $
    3,263
    
    
    $
    3,603
    
    
    $
    3,470
    
    
    $
    3,454Additional paid-in-capital
    
    
    280,685
    
    
    
    281,596
    
    
    
    280,224
    
    
    
    269,420
    
    
    
    265,966Warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    612
    
    
    
    612Accumulated other comprehensive income
(loss)
    
    
    2,148
    
    
    
    908
    
    
    
    (4,712
    )
    
    
    (2,375
    )
    
    
    (4,254
    )Retained earnings (deficit)
    
    
    (628,443
    )
    
    
    (2,088,723
    )
    
    
    (372,577
    )
    
    
    190,964
    
    
    
    96,073Total shareholders equity (deficit)
of Primus Guaranty, Ltd.
    
    
    (342,549
    )
    
    
    (1,802,956
    )
    
    
    (93,462
    )
    
    
    462,091
    
    
    
    361,851Preferred securities of subsidiary
    
    $
    93,102
    
    
    $
    98,521
    
    
    $
    98,521
    
    
    $
    98,521
    
    
    $
    98,521Total equity (deficit)
    
    
    (249,447
    )
    
    
    (1,704,435
    )
    
    
    5,059
    
    
    
    560,612
    
    
    
    460,372Total liabilities and equity (deficit)
    
    $
    732,747
    
    
    $
    794,231
    
    
    $
    888,646
    
    
    $
    902,468
    
    
    $
    673,082Per Share Data:Book value per share(1)
    
    $
    (8.95
    )
    
    $
    (44.21
    )
    
    $
    (2.08
    )
    
    $
    10.65
    
    
    $
    8.38
 
 (1)
    
    Book value per share is based on total shareholders equity (deficit) divided by basic
common shares outstanding. 30




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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 Asset Management
   Primus Financial
    31




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##### Table of Contents



PRS Trading / Harrier
   Executive Overview and Business Outlook
    
    
    Pursuing new asset management opportunities in corporate credit either through
acquisition or in new organically developed product;
    
    Actively managing the amortization of Primus Financials credit swap portfolio;
    
    Developing a new credit protection business
    
    Allocating capital to benefit shareholders and to support business growth; and
    
    Aligning costs with our business initiatives.
  32




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33




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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.
 34




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##### Table of Contents




    
    Valuation models, which are used to derive a fair value of credit swaps. The valuation
models have been internally developed but are benchmarked against market-standard models.
    
    Consideration of 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.
    
    Fair value estimates 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 pricing service. The independent pricing service obtains
mid-market credit swap premium quotes from a number of dealers in the credit swap market
across a range of standard maturities and restructuring terms, and computes composite
credit swap premium quotes on specific Reference Entities. The inputs to the valuation
model include: current credit swap premium quotes on the Reference Entities, estimated
recovery rates on each Reference Entities, current interest rates and foreign exchange
rates. We adjust 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 pricing service
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, the valuation model uses expected cash flows on the underlying
securities obtained from an independent valuation service and quotes from credit swap
counterparties. The cash flow data is used as input to an ABS valuation model to obtain
mid-market valuations. The mid-market valuations are adjusted to obtain exit price
valuations.
 Nonperformance Risk Adjustment
 Fair Value Measurements and Disclosures,
 35




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##### Table of Contents



December 31,
    
    
    December 31,2009
    
    
    2008Unrealized loss on credit swaps, at fair
value, without nonperformance risk
adjustments
    
    $
    906,382
    
    
    $
    3,427,076Nonperformance risk adjustments
    
    
    (214,477
    )
    
    
    (1,253,615
    )Unrealized loss on credit swaps, at fair
value, after nonperformance risk
adjustments
    
    $
    691,905
    
    
    $
    2,173,461
  Years Ended December 31,2009
    
    
    2008Net credit swap revenue (loss) without
nonperformance risk adjustments
    
    $
    2,494,940
    
    
    $
    (2,942,487
    )Nonperformance risk adjustments
    
    
    (1,039,138
    )
    
    
    1,253,615Net credit swap revenue (loss) after
nonperformance risk adjustments
    
    $
    1,455,802
    
    
    $
    (1,688,872
    )
 Fair Value Hierarchy  Level 3
    Goodwill and Other Intangible Assets
 Goodwill
   36




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Other Intangible Assets
      Impact of Recent Accounting Pronouncement
    Counterparty Default  Lehman Brothers Special Financing Inc.
   37




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Results of Operations
 Introduction
    Year Ended December 31, 2009 Compared With Year Ended December 31, 2008
 Overview of Financial Results
       38




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##### Table of Contents



Net Credit Swap Revenue (Loss)
   Years EndedDecember 31,2009
    
    
    2008Primus Financial
    
    $
    1,455,802
    
    
    $
    (1,689,584
    )Harrier
    
    
    
    
    
    
    712Total consolidated net credit swap revenue (loss)
    
    $
    1,455,802
    
    
    $
    (1,688,872
    )
   Net Credit Swap Revenue (Loss)  Primus Financial
   
    
    Net premiums earned;
    
    Net realized gains (losses) on credit swaps, which include gain (losses) on terminated
credit swaps sold and losses on credit events during the period; and
    
    Net unrealized gains (losses) on credit swaps.
  39




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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  Primus Financial
  
    
    Premium income on single name credit swaps sold;
    
    Premium income on tranches sold;
    
    Premium income on CDS on ABS; and
    
    Net premium income (expense) on credit swaps undertaken to offset credit risk.
  Years EndedDecember 31,2009
    
    
    2008Premium income on single name credit swaps sold
    
    $
    64,824
    
    
    $
    80,830Premium income on tranches sold
    
    
    19,884
    
    
    
    20,673Premium income on CDS on ABS
    
    
    397
    
    
    
    1,057Net premium income (expense) on credit swaps
undertaken to offset credit risk
    
    
    11
    
    
    
    (59
    )Total net premiums earned
    
    $
    85,116
    
    
    $
    102,501
  Net Realized Gains (Losses) on Credit Swaps  Primus Financial
  Years EndedDecember 31,2009
    
    
    2008Realized gains on terminated single name credit swaps sold
    
    $
    
    
    
    $
    28Realized losses on single name credit swaps sold
    
    
    (68,501
    )
    
    
    (150,469
    )Realized losses on CDS on ABS
    
    
    (34,540
    )
    
    
    (12,216
    )Realized losses on terminated tranches sold
    
    
    (9,947
    )
    
    
    Net realized gains (losses) on terminated credit swaps
undertaken to offset credit risk
    
    
    (89
    )
    
    
    4Total net realized losses on credit swaps
    
    $
    (113,077
    )
    
    $
    (162,653
    )
  40




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Net Unrealized Gains (Losses) on Credit Swaps  Primus Financial
  Years EndedDecember 31,2009
    
    
    2008Net unrealized gains (losses) on credit swaps sold
    
    $
    658,245
    
    
    $
    (670,152
    )Net unrealized gains (losses) on tranches sold
    
    
    800,833
    
    
    
    (956,462
    )Net unrealized gains (losses) on CDS on ABS
    
    
    26,658
    
    
    
    (4,737
    )Net unrealized gains (losses) on credit swaps
undertaken to offset credit risk
    
    
    (1,973
    )
    
    
    1,919Total net unrealized gains (losses) on credit swaps
    
    $
    1,483,763
    
    
    $
    (1,629,432
    )
   Asset Management and Advisory Fees
    41




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Interest Income
    Years EndedDecember 31,2009
    
    
    2008Interest income
    
    $
    6,747
    
    
    $
    26,586Cash and cash equivalents
    
    $
    299,514
    
    
    $
    280,912Restricted cash and investments
    
    
    127,116
    
    
    
    Investments
    
    
    274,444
    
    
    
    486,870Total cash, cash equivalents, restricted cash and investments
    
    $
    701,074
    
    
    $
    767,782
 Gain on Retirement of Long-Term Debt
      42




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Impairment Losses on Investments
  Other Income (Loss)
   Operating Expenses
  Years EndedDecember 31,2009
    
    
    2008Compensation and employee benefits
    
    $
    20,205
    
    
    $
    16,370Professional and legal fees
    
    
    7,683
    
    
    
    4,331Depreciation and amortization
    
    
    1,250
    
    
    
    1,329Technology and data
    
    
    3,265
    
    
    
    3,790Other
    
    
    7,896
    
    
    
    5,312Total operating expenses
    
    $
    40,299
    
    
    $
    31,132Number of full-time employees, at end of period
    
    
    47
    
    
    
    42
    43




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Interest Expense and Preferred Distributions
       44




---



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Income Taxes
  Year Ended December 31, 2008 Compared With Year Ended December 31, 2007
 Overview of Financial Results
        45




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##### Table of Contents



Net Credit Swap Loss
   Years EndedDecember 31,2008
    
    
    2007Primus Financial
    
    $
    (1,689,584
    )
    
    $
    (530,369
    )PRS Trading/Harrier
    
    
    712
    
    
    
    (4,695
    )Total consolidated net credit swap loss
    
    $
    (1,688,872
    )
    
    $
    (535,064
    )
   Net Credit Swap Loss  Primus Financial
   
    
    Net premiums earned;
 
    
    Net realized gains (losses) on credit swaps, which include gain (losses) on terminated
credit swaps sold and losses on credit events during the period; and
 
    
    Net unrealized gains (losses) on credit swaps.
  Years EndedDecember 31,2008
    
    
    2007Net premiums earned
    
    $
    102,501
    
    
    $
    84,576Net realized losses on credit swaps
    
    
    (162,653
    )
    
    
    (394
    )Net unrealized losses on credit swaps
    
    
    (1,629,432
    )
    
    
    (614,551
    )Total net credit swap loss
    
    $
    (1,689,584
    )
    
    $
    (530,369
    )
  46




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Net Premiums Earned  Primus Financial
  
    
    Premium income on single name credit swaps sold;
 
    
    Premium income on tranches sold;
 
    
    Premium income on CDS on ABS; and
 
    
    Net premium expense on credit swaps undertaken to offset credit risk.
  Years EndedDecember 31,2008
    
    
    2007Premium income on single name credit swaps sold
    
    $
    80,830
    
    
    $
    70,788Premium income on tranches sold
    
    
    20,673
    
    
    
    13,075Premium income on CDS on ABS
    
    
    1,057
    
    
    
    739Net premium expense on credit swaps undertaken
to offset credit risk
    
    
    (59
    )
    
    
    (26
    )Total net premiums earned
    
    $
    102,501
    
    
    $
    84,576
     47




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Net Realized Gains (Losses) on Credit Swaps  Primus Financial
  Years EndedDecember 31,2008
    
    
    2007Realized gains on terminated credit swaps sold
    
    $
    28
    
    
    $
    3,688Net realized losses on credit events
    
    
    (157,932
    )
    
    
    Other realized losses on terminated credit swaps sold
    
    
    (4,753
    )
    
    
    (3,784
    )Net realized gains (losses) on terminated credit
swaps undertaken to offset credit risk
    
    
    4
    
    
    
    (298
    )Total net realized losses on credit swaps
    
    $
    (162,653
    )
    
    $
    (394
    )
  Credit Events
  Credit Swaps Sold Single Name
    Net RealizedNotional
    
    
    Losses on(in thousands)
    
    Amount
    
    
    Credit EventsSingle Name Reference EntityFederal National Mortgage Association (Fannie
Mae)
    
    $
    80,000
    
    
    $
    1,758Federal Home Loan Mortgage Corporation
(Freddie Mac)
    
    
    110,000
    
    
    
    3,000Lehman Brothers Holdings Inc.
    
    
    80,000
    
    
    
    73,100Washington Mutual, Inc.
    
    
    10,130
    
    
    
    6,562Kaupthing Bank hf
    
    
    65,513
    
    
    
    61,296Total
    
    $
    345,643
    
    
    $
    145,716
  48




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CDS on ABS
      Net Unrealized Gains (Losses) on Credit Swaps  Primus Financial
  Years EndedDecember 31,2008
    
    
    2007Net unrealized losses on credit swaps sold
    
    $
    (670,152
    )
    
    $
    (248,914
    )Net unrealized losses on tranches sold
    
    
    (956,462
    )
    
    
    (317,028
    )Net unrealized losses on CDS on ABS
    
    
    (4,737
    )
    
    
    (48,658
    )Net unrealized gains on credit swaps
undertaken to offset credit risk
    
    
    1,919
    
    
    
    49Total net unrealized losses on credit swaps
    
    $
    (1,629,432
    )
    
    $
    (614,551
    )
  49




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Asset Management and Advisory Fees
    Interest Income
   December 31,2008
    
    
    2007Interest income
    
    $
    26,586
    
    
    $
    41,847Cash and cash equivalents
    
    $
    280,912
    
    
    $
    242,665Investments
    
    
    482,930
    
    
    
    617,631Total cash, cash equivalents and investments
    
    $
    763,842
    
    
    $
    860,296
  50




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Gain on Retirement of Long-Term Debt
  Impairment Loss on Investments
  Other Income (Loss)
   Operating Expenses
  Years EndedDecember 31,2008
    
    
    2007Compensation and employee benefits
    
    $
    16,370
    
    
    $
    22,450Professional and legal fees
    
    
    4,331
    
    
    
    4,948Depreciation and amortization
    
    
    1,329
    
    
    
    1,748Technology and data
    
    
    3,790
    
    
    
    4,620Other
    
    
    5,312
    
    
    
    5,872Total operating expenses
    
    $
    31,132
    
    
    $
    39,638Number of full-time employees, at end of period
    
    
    42
    
    
    
    58
  51




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Interest Expense and Preferred Distributions
       52




---



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Income Taxes
  Income Taxes
    53




---



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Non-GAAP Financial Measures  Economic Results
   
    
    Unrealized gains (losses) on credit swaps sold by Primus Financial are excluded from
GAAP net income (loss) available to common shares;
    
    Realized gains from early termination of credit swaps sold by Primus Financial are
excluded from GAAP net income (loss) available to common shares;
    
    Realized gains from early termination of credit swaps sold by Primus Financial are
amortized over the period that would have been the remaining life of the credit swap, and
that amortization is added to GAAP net income (loss) available to common shares; and
    
    Provision for CDS on ABS credit events; and
    
    Reduction in provision for CDS on ABS credit events upon termination of credit swaps.
    54




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Years Ended December 31,(in thousands, except per share data)
    
    2009
    
    
    2008
    
    
    2007GAAP net income (loss) available to common
shares
    
    $
    1,460,280
    
    
    $
    (1,716,146
    )
    
    $
    (563,541
    )Adjustments:Less: Change in unrealized fair value of
credit swaps sold (gain) loss by Primus
Financial
    
    
    (1,483,763
    )
    
    
    1,629,432
    
    
    
    614,551Less: Realized gains from early termination
of credit swaps sold by Primus Financial
    
    
    
    
    
    
    (28
    )
    
    
    (3,463
    )Add: Amortization of realized gains from
the early termination of credit swaps sold
by Primus Financial
    
    
    1,414
    
    
    
    2,173
    
    
    
    6,044Less: Provision for CDS on ABS credit events
    
    
    (16,208
    )
    
    
    (9,328
    )
    
    
    (40,880
    )Add: Reduction in provision for CDS on ABS
credit events upon termination of credit
swaps
    
    
    34,540
    
    
    
    12,216
    
    
    
    Net Economic Results
    
    $
    (3,737
    )
    
    $
    (81,681
    )
    
    $
    12,711Economic Results earnings per GAAP diluted
share
    
    $
    (0.09
    )
    
    $
    (1.83
    )
    
    $
    0.28Economic Results weighted average common
shares outstanding  GAAP diluted
    
    
    41,414
    
    
    
    44,722
    
    
    
    45,194
  Liquidity and Capital Resources
 Capital Strategy
     55




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Cash Flows
 Cash flows from operating activities 
  Cash flows from investing activities 
  Cash flows from financing activities
   56




---



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Off-Balance Sheet Arrangements
   Contractual Obligations
  Payment due by periodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsProperty leases
    
    $
    9,728
    
    
    $
    1,837
    
    
    $
    3,556
    
    
    $
    2,312
    
    
    $
    2,0237% Senior Notes
    
    
    94,613
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94,613Interest on 7% Senior Notes (a)
    
    
    170,131
    
    
    
    2,294
    
    
    
    8,960
    
    
    
    13,246
    
    
    
    145,631Subordinated deferrable interest
notes
    
    
    147,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    147,600Interest on subordinated
deferrable interest notes (b)
    
    
    76,681
    
    
    
    5,078
    
    
    
    10,170
    
    
    
    10,156
    
    
    
    51,277Total
    
    $
    498,753
    
    
    $
    9,209
    
    
    $
    22,686
    
    
    $
    25,714
    
    
    $
    441,144
 
 (a)
    
    Net interest payments on the outstanding 7% Senior Notes at December 31, 2009 are adjusted by
the interest rate swap agreement, which converts a portion of the interest payment on the 7% Senior
Notes from a fixed to a floating basis, as previously discussed. Future payments of interest on the
interest rate swap will be determined by future LIBOR rates, to which a predetermined contractual
rate is added. For the purpose of this table, estimated future LIBOR rates were based on the last
rate set during the fourth quarter of 2009. The counterparty has the right to terminate the
interest rate swap agreement in 2011, and for the purpose of this table, the interest rate swap is
assumed to be terminated at that date.(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 2009. Property leases:
   57




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7% Senior Notes and Subordinated deferrable interest notes:
 
 Item 7A. Quantitative and Qualitative Disclosures about Market Risk
     58




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Item 8. Financial Statements and Supplementary Data
 Primus Guaranty, Ltd.
Index to Consolidated Financial Statements
 Reports of Independent Registered Public Accounting Firm
    
    
    60Managements Report on Internal Control over Financial Reporting
    
    
    62Consolidated Statements of Financial Condition as of December 31, 2009 and 2008
    
    
    63Consolidated Statements of Operations for the years ended December 31, 2009, 2008, and 2007
    
    
    64Consolidated Statements of Shareholders Equity (Deficit) for the years ended December 31,
2009, 2008 and 2007
    
    
    65Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007
    
    
    66Notes to Consolidated Financial Statements
    
    
    67
   59




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/s/ Ernst & Young LLPNew York, New York   60




---



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/s/ Ernst & Young LLPNew York, New York   61




---



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/s/ Thomas W. Jasper
    
    
    
    /s/ Richard ClaidenThomas W. Jasper
    
    
    
    Richard ClaidenChief Executive Officer
    
    
    
    Chief Financial Officer
  62




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##### Table of Contents



Primus Guaranty, Ltd.
Consolidated Statements of Financial Condition  (in thousands except share amounts)
 December 31,2009
    
    
    2008AssetsCash and cash equivalents
    
    $
    299,514
    
    
    $
    280,912Investments (includes $274,275 and $486,870 at
fair value as of December 31, 2009 and 2008,
respectively)
    
    
    274,444
    
    
    
    486,870Restricted cash and investments
    
    
    127,116
    
    
    
    Accrued interest receivable
    
    
    3,914
    
    
    
    3,704Accrued premiums and receivables on credit swaps
    
    
    2,249
    
    
    
    2,764Unrealized gain on credit swaps, at fair value
    
    
    2,207
    
    
    
    Fixed assets and software costs, net
    
    
    1,838
    
    
    
    3,308Debt issuance costs, net
    
    
    4,736
    
    
    
    6,153Goodwill
    
    
    3,922
    
    
    
    Intangible assets, net
    
    
    4,095
    
    
    
    Other assets
    
    
    8,712
    
    
    
    10,520Total assets
    
    $
    732,747
    
    
    $
    794,231Liabilities and Equity (deficit)LiabilitiesAccounts payable and accrued expenses
    
    $
    2,855
    
    
    $
    1,737Accrued compensation
    
    
    5,000
    
    
    
    1,768Unrealized loss on credit swaps, at fair value
    
    
    691,905
    
    
    
    2,173,461Payable for credit events
    
    
    28,596
    
    
    
    3,186Long-term debt
    
    
    244,051
    
    
    
    317,535Other liabilities
    
    
    9,787
    
    
    
    979Total liabilities
    
    
    982,194
    
    
    
    2,498,666Commitments and contingenciesEquity (deficit)Common shares, $0.08 par value, 62,500,000
shares authorized, 38,267,546 and 40,781,538
shares issued and outstanding at December 31,
2009 and 2008
    
    
    3,061
    
    
    
    3,263Additional paid-in capital
    
    
    280,685
    
    
    
    281,596Accumulated other comprehensive income
    
    
    2,148
    
    
    
    908Retained earnings (deficit)
    
    
    (628,443
    )
    
    
    (2,088,723
    )Total shareholders equity (deficit) of
Primus Guaranty, Ltd.
    
    
    (342,549
    )
    
    
    (1,802,956
    )Preferred securities of subsidiary
    
    
    93,102
    
    
    
    98,521Total equity (deficit)
    
    
    (249,447
    )
    
    
    (1,704,435
    )Total liabilities and equity (deficit)
    
    $
    732,747
    
    
    $
    794,231
 See accompanying Notes to Consolidated Financial Statements.
  63




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Primus Guaranty, Ltd.
Consolidated Statements of Operations  (in thousands except per share amounts)
 Years Ended December 31,2009
    
    
    2008
    
    
    2007RevenuesNet credit swap revenue (loss)
    
    $
    1,455,802
    
    
    $
    (1,688,872
    )
    
    $
    (535,064
    )Asset management and advisory fees
    
    
    5,118
    
    
    
    4,052
    
    
    
    3,481Interest income
    
    
    6,747
    
    
    
    26,586
    
    
    
    41,847Gain on retirement of long-term debt
    
    
    43,151
    
    
    
    9,716
    
    
    
    Impairment loss on investments
    
    
    (761
    )
    
    
    (11,896
    )
    
    
    Other income (loss)
    
    
    3,240
    
    
    
    (865
    )
    
    
    (2,796
    )Total revenues (losses)
    
    
    1,513,297
    
    
    
    (1,661,279
    )
    
    
    (492,532
    )ExpensesCompensation and employee benefits
    
    
    20,205
    
    
    
    16,370
    
    
    
    22,450Professional and legal fees
    
    
    7,683
    
    
    
    4,331
    
    
    
    4,948Depreciation and amortization
    
    
    1,250
    
    
    
    1,329
    
    
    
    1,748Technology and data
    
    
    3,265
    
    
    
    3,790
    
    
    
    4,620Interest expense
    
    
    9,116
    
    
    
    17,032
    
    
    
    20,729Restructuring costs
    
    
    
    
    
    
    
    
    
    
    3,022Other
    
    
    7,896
    
    
    
    5,312
    
    
    
    5,872Total expenses
    
    
    49,415
    
    
    
    48,164
    
    
    
    63,389Income (loss) before provision for income taxes
    
    
    1,463,882
    
    
    
    (1,709,443
    )
    
    
    (555,921
    )Provision for income taxes
    
    
    185
    
    
    
    61
    
    
    
    52Net income (loss)
    
    
    1,463,697
    
    
    
    (1,709,504
    )
    
    
    (555,973
    )Distributions on preferred securities of subsidiary
    
    
    3,417
    
    
    
    6,642
    
    
    
    7,568Net income (loss) available to common shares
    
    $
    1,460,280
    
    
    $
    (1,716,146
    )
    
    $
    (563,541
    )Income (loss) per common share:Basic
    
    $
    36.38
    
    
    $
    (38.37
    )
    
    $
    (12.58
    )Diluted
    
    $
    35.26
    
    
    $
    (38.37
    )
    
    $
    (12.58
    )Weighted average common shares outstanding:Basic
    
    
    40,142
    
    
    
    44,722
    
    
    
    44,808Diluted
    
    
    41,414
    
    
    
    44,722
    
    
    
    44,808
 See accompanying Notes to Consolidated Financial Statements.
  64




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Primus Guaranty, Ltd.
Consolidated Statements of Shareholders Equity (Deficit)  (in thousands)
 Years Ended December 31,2009
    
    
    2008
    
    
    2007Common sharesBalance at beginning of year
    
    $
    3,263
    
    
    $
    3,603
    
    
    $
    3,470Conversion of warrants to common shares
    
    
    
    
    
    
    
    
    
    
    113Shares purchased and retired
    
    
    (275
    )
    
    
    (359
    )
    
    
    Shares issued under employee compensation plans
    
    
    73
    
    
    
    19
    
    
    
    15Issuance of common shares from exercise of options
    
    
    
    
    
    
    
    
    
    
    5Balance at end of year
    
    
    3,061
    
    
    
    3,263
    
    
    
    3,603Additional paid-in-capitalBalance at beginning of year
    
    
    281,596
    
    
    
    280,224
    
    
    
    269,420Conversion of warrants to common shares
    
    
    
    
    
    
    
    
    
    
    7,834Shares purchased and retired
    
    
    (10,150
    )
    
    
    (3,220
    )
    
    
    (1,316
    )Shares vested under employee compensation plans
    
    
    4,728
    
    
    
    4,592
    
    
    
    3,733Preferred shares purchased by subsidiary
    
    
    4,511Issuance of common shares from exercise of options
    
    
    
    
    
    
    
    
    
    
    553Balance at end of year
    
    
    280,685
    
    
    
    281,596
    
    
    
    280,224WarrantsBalance at beginning of year
    
    
    
    
    
    
    
    
    
    
    612Conversion of warrants to common shares
    
    
    
    
    
    
    
    
    
    
    (612
    )Balance at end of year
    
    
    
    
    
    
    
    
    
    
    Accumulated other comprehensive income (loss)Balance at beginning of year
    
    
    908
    
    
    
    (4,712
    )
    
    
    (2,375
    )Foreign currency translation adjustments
    
    
    232
    
    
    
    (447
    )
    
    
    (18
    )Change in unrealized holding gains (losses) on
available-for-sale securities
    
    
    1,008
    
    
    
    6,067
    
    
    
    (2,319
    )Balance at end of year
    
    
    2,148
    
    
    
    908
    
    
    
    (4,712
    )Retained earnings (deficit)Balance at beginning of year
    
    
    (2,088,723
    )
    
    
    (372,577
    )
    
    
    190,964Net income (loss)
    
    
    1,463,697
    
    
    
    (1,709,504
    )
    
    
    (555,973
    )Distributions on preferred securities of subsidiary
    
    
    (3,417
    )
    
    
    (6,642
    )
    
    
    (7,568
    )Balance at end of year
    
    
    (628,443
    )
    
    
    (2,088,723
    )
    
    
    (372,577
    )Total shareholders equity (deficit) of Primus
Guaranty, Ltd.
    
    
    (342,549
    )
    
    
    (1,802,956
    )
    
    
    (93,462
    )Preferred securities of subsidiaryBalance at beginning of year
    
    
    98,521
    
    
    
    98,521
    
    
    
    98,521Net purchase of preferred shares
    
    
    (5,419
    )
    
    
    
    
    
    
    Balance at end of year
    
    
    93,102
    
    
    
    98,521
    
    
    
    98,521Total equity (deficit) at end of year
    
    $
    (249,447
    )
    
    $
    (1,704,435
    )
    
    $
    5,059Comprehensive income (loss)Net income (loss)
    
    $
    1,463,697
    
    
    $
    (1,709,504
    )
    
    $
    (555,973
    )Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    232
    
    
    
    (447
    )
    
    
    (18
    )Change in unrealized gains (losses) on
available-for-sale investments
    
    
    1,008
    
    
    
    6,067
    
    
    
    (2,319
    )Comprehensive income (loss)
    
    
    1,464,937
    
    
    
    (1,703,884
    )
    
    
    (558,310
    )Distributions on preferred securities of subsidiary
    
    
    3,417
    
    
    
    6,642
    
    
    
    7,568Comprehensive income (loss) available to common
shares
    
    $
    1,461,520
    
    
    $
    (1,710,526
    )
    
    $
    (565,878
    )
 See accompanying Notes to Consolidated Financial Statements.
  65




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Primus Guaranty, Ltd.
Consolidated Statements of Cash Flows  (in thousands)
 Years Ended December 31,2009
    
    
    2008
    
    
    2007Cash flows from operating activitiesNet income (loss) available to common shares
    
    $
    1,460,280
    
    
    $
    (1,716,146
    )
    
    $
    (563,541
    )Net preferred distributions of subsidiary
    
    
    3,417
    
    
    
    6,642
    
    
    
    7,568Net income (loss)
    
    
    1,463,697
    
    
    
    (1,709,504
    )
    
    
    (555,973
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Non-cash items included in net income (loss):Depreciation and amortization
    
    
    1,250
    
    
    
    1,329
    
    
    
    1,748Share-based compensation
    
    
    4,728
    
    
    
    4,611
    
    
    
    3,748Net unrealized (gain) loss on credit swap portfolio
    
    
    (1,483,763
    )
    
    
    1,629,336
    
    
    
    614,524Net amortization of premium and discount on
securities
    
    
    687
    
    
    
    (2,240
    )
    
    
    (8,245
    )Gain on retirement of long-term debt
    
    
    (43,151
    )
    
    
    (9,716
    )
    
    
    Impairment loss on investments
    
    
    761
    
    
    
    11,896
    
    
    
    Restructuring costs
    
    
    
    
    
    
    
    
    
    
    3,022Loss on disposal of assets
    
    
    795
    
    
    
    1,101
    
    
    
    Amortization of debt issuance costs
    
    
    252
    
    
    
    307
    
    
    
    311Increase (decrease) in cash resulting from changes in:Restricted cash
    
    
    (90,610
    )
    
    
    
    
    
    
    Accrued interest receivable
    
    
    (210
    )
    
    
    3,980
    
    
    
    (1,310
    )Accrued premiums and receivables on credit swaps
    
    
    515
    
    
    
    1,423
    
    
    
    (165
    )Other assets
    
    
    (3,123
    )
    
    
    261
    
    
    
    (1,205
    )Trading account assets
    
    
    3,940
    
    
    
    (3,940
    )
    
    
    14,537Accounts payable and accrued expenses
    
    
    (309
    )
    
    
    (445
    )
    
    
    (549
    )Accrued compensation
    
    
    3,232
    
    
    
    (4,189
    )
    
    
    (1,665
    )Payable for credit events
    
    
    25,410
    
    
    
    3,186
    
    
    
    Trading account liabilities
    
    
    
    
    
    
    
    
    
    
    (1,002
    )Accrued premiums and payables on credit swaps
    
    
    
    
    
    
    (1,770
    )
    
    
    1,726Restructuring liabilities
    
    
    
    
    
    
    (1,709
    )
    
    
    (911
    )Other liabilities
    
    
    2,577
    
    
    
    (355
    )
    
    
    109Net cash provided by (used in) operating activities
    
    
    (113,322
    )
    
    
    (76,438
    )
    
    
    68,700Cash flows from investing activitiesBusiness acquisition, net of cash received
    
    
    (2,214
    )
    
    
    
    
    
    
    Fixed asset purchases and capitalized software costs
    
    
    (121
    )
    
    
    (702
    )
    
    
    (2,805
    )Payments received from CLO investments
    
    
    94
    
    
    
    3,399
    
    
    
    981Purchases of investments, including restricted investments
    
    
    (321,596
    )
    
    
    (1,538,046
    )
    
    
    (743,752
    )Maturities and sales of available-for-sale investments
    
    
    493,399
    
    
    
    1,665,759
    
    
    
    715,977Net cash provided by (used in) investing activities
    
    
    169,562
    
    
    
    130,410
    
    
    
    (29,599
    )Cash flows from financing activitiesRetirement of long-term debt
    
    
    (23,192
    )
    
    
    (5,057
    )
    
    
    Purchase and retirement of common shares
    
    
    (10,352
    )
    
    
    (3,579
    )
    
    
    (1,170
    )Proceeds from employee exercise of share options
    
    
    
    
    
    
    
    
    
    
    557Proceeds from exercise of warrants
    
    
    
    
    
    
    
    
    
    
    7,335Purchase of preferred securities of subsidiary
    
    
    (908
    )
    
    
    
    
    
    
    Net preferred distributions of subsidiary
    
    
    (3,417
    )
    
    
    (6,642
    )
    
    
    (7,568
    )Net cash provided by (used in) financing activities
    
    
    (37,869
    )
    
    
    (15,278
    )
    
    
    (846
    )Net effect of exchange rate changes on cash
    
    
    231
    
    
    
    (447
    )
    
    
    (18
    )Net increase in cash
    
    
    18,602
    
    
    
    38,247
    
    
    
    38,237Cash and cash equivalents at beginning of year
    
    
    280,912
    
    
    
    242,665
    
    
    
    204,428Cash and cash equivalents at end of year
    
    $
    299,514
    
    
    $
    280,912
    
    
    $
    242,665Supplemental disclosuresCash paid for interest
    
    $
    10,159
    
    
    $
    16,897
    
    
    $
    20,212Cash paid for taxes
    
    
    137
    
    
    
    46
    
    
    
    53
 See accompanying Notes to Consolidated Financial Statements.
  66




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##### Table of Contents



Primus Guaranty, Ltd.
 Notes to Consolidated Financial Statements
 1.
    
    Organization and Business
        67




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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
   68




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 Interest Income
  Other Income (Loss)
  Credit Swaps
   Foreign Currency Translation
  Goodwill and Other Intangible Assets
 Intangibles  Goodwill and Other
   69




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  Fixed Assets and Software Costs
   Deferred Debt Issuance Costs
  Income Taxes
  Share-Based Compensation
   Recent Accounting Pronouncements
 Generally Accepted Accounting Principles
  70




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 Business Combinations Business Combinations
 Consolidation
 Derivatives and Hedging
     71




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
   Subsequent Events
  Measuring Liabilities at Fair Value Fair Value Measurements and
Disclosures,
 Fair Value Measurements and Disclosures
(Topic 820)  Improving Disclosures about Fair Value Measurements
  72




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 3.
    
    Investments
  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
    
    
    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
 December 31, 2008Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAvailable-for-sale:U.S. government agency obligations
    
    $
    458,909
    
    
    $
    2,016
    
    
    $
    (39
    )
    
    $
    460,886Collateralized loan obligations
    
    
    791
    
    
    
    
    
    
    
    
    
    
    
    791Corporate debt securities
    
    
    22,076
    
    
    
    84
    
    
    
    (912
    )
    
    
    21,248ABS
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5Total available-for-sale
    
    
    481,781
    
    
    
    2,100
    
    
    
    (951
    )
    
    
    482,930Trading:Corporate debt securities
    
    
    3,940
    
    
    
    
    
    
    
    
    
    
    
    3,940Total trading
    
    
    3,940
    
    
    
    
    
    
    
    
    
    
    
    3,940Total investments
    
    $
    485,721
    
    
    $
    2,100
    
    
    $
    (951
    )
    
    $
    486,870
  73




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  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
    
    
    79
    
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    79
    
    
    
    (5
    )Total
    
    $
    122,062
    
    
    $
    (410
    )
    
    $
    2,248
    
    
    $
    (257
    )
    
    $
    124,310
    
    
    $
    (667
    )
 December 31, 2008Securities with Unrealized LossesLess than 12 Months
    
    
    12 Months or More
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesU.S. government agency obligations
    
    $
    24,968
    
    
    $
    (39
    )
    
    $
    
    
    
    $
    
    
    
    $
    24,968
    
    
    $
    (39
    )Corporate debt securities
    
    
    17,364
    
    
    
    (912
    )
    
    
    
    
    
    
    
    
    
    
    17,364
    
    
    
    (912
    )Total
    
    $
    42,332
    
    
    $
    (951
    )
    
    $
    
    
    
    $
    
    
    
    $
    42,332
    
    
    $
    (951
    )
     74




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 4.
    
    Net Credit Swap Revenue (Loss) and Credit Swap Portfolio
 Overview
       75




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
    Consolidated Net Credit Swap Revenue (Loss) and Credit Swap Portfolio Information
  Years Ended December 31,2009
    
    
    2008
    
    
    2007Net premium income
    
    $
    85,116
    
    
    $
    102,515
    
    
    $
    84,771Net realized losses
    
    
    (113,077
    )
    
    
    (161,957
    )
    
    
    (5,190
    )Net change in unrealized gains (losses)
    
    
    1,483,763
    
    
    
    (1,629,430
    )
    
    
    (614,645
    )Net credit swap revenue (loss)
    
    $
    1,455,802
    
    
    $
    (1,688,872
    )
    
    $
    (535,064
    )
   76




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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  December 31,
    
    
    December 31,2009
    
    
    2008Gross Notional Amounts:Credit swaps sold-single name
    
    $
    13,367,919
    
    
    $
    17,477,946Credit swaps sold-tranche
    
    
    4,100,000
    
    
    
    5,000,000CDS on ABS
    
    
    31,682
    
    
    
    67,654Credit swaps purchased-single name
    
    
    (8,160
    )
    
    
    (11,740
    )Fair value:Asset
    
    
    2,207
    
    
    
    Liability
    
    
    691,905
    
    
    
    2,173,461
    77




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 December 31, 2009
    
    
    December 31, 2008Notional
    
    
    Fair
    
    
    Notional
    
    
    FairMoodys Rating Category
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueBy Single Name Reference Entity/TrancheCredit Swaps Sold-Single Name:Aaa
    
    $
    242,963
    
    
    $
    (5,131
    )
    
    $
    525,812
    
    
    $
    (19,442
    )Aa
    
    
    2,031,359
    
    
    
    (9,633
    )
    
    
    2,815,912
    
    
    
    (83,984
    )A
    
    
    5,012,922
    
    
    
    (8,289
    )
    
    
    5,825,968
    
    
    
    (162,262
    )Baa
    
    
    4,666,038
    
    
    
    (9,188
    )
    
    
    6,629,514
    
    
    
    (321,765
    )Ba
    
    
    848,426
    
    
    
    (16,225
    )
    
    
    1,168,506
    
    
    
    (128,516
    )B
    
    
    230,642
    
    
    
    (12,642
    )
    
    
    253,422
    
    
    
    (30,355
    )Caa
    
    
    40,000
    
    
    
    (268
    )
    
    
    112,812
    
    
    
    (47,423
    )Ca
    
    
    198,087
    
    
    
    (105,803
    )
    
    
    105,000
    
    
    
    (48,506
    )C
    
    
    
    
    
    
    
    
    
    
    35,000
    
    
    
    (3,189
    )D
    
    
    41,000
    
    
    
    (21,868
    )
    
    
    6,000
    
    
    
    (782
    )Non rated
    
    
    56,482
    
    
    
    (628
    )
    
    
    
    
    
    
    Total
    
    $
    13,367,919
    
    
    $
    (189,675
    )
    
    $
    17,477,946
    
    
    $
    (846,224
    )Credit Swaps Sold-Tranche:Aaa
    
    $
    575,000
    
    
    $
    (24,292
    )
    
    $
    2,700,000
    
    
    $
    (495,997
    )Aa
    
    
    2,275,000
    
    
    
    (218,226
    )
    
    
    1,350,000
    
    
    
    (386,705
    )A
    
    
    300,000
    
    
    
    (37,719
    )
    
    
    200,000
    
    
    
    (73,091
    )Baa
    
    
    550,000
    
    
    
    (78,879
    )
    
    
    600,000
    
    
    
    (231,999
    )Ba
    
    
    100,000
    
    
    
    (17,373
    )
    
    
    
    
    
    
    B
    
    
    200,000
    
    
    
    (45,393
    )
    
    
    150,000
    
    
    
    (88,725
    )Caa
    
    
    50,000
    
    
    
    (21,208
    )
    
    
    
    
    
    
    Ca
    
    
    50,000
    
    
    
    (32,594
    )
    
    
    
    
    
    
    Total
    
    $
    4,100,000
    
    
    $
    (475,684
    )
    
    $
    5,000,000
    
    
    $
    (1,276,517
    )CDS on ABS:A
    
    $
    
    
    
    $
    
    
    
    $
    5,000
    
    
    $
    (2,530
    )Baa
    
    
    3,682
    
    
    
    (2,880
    )
    
    
    15,000
    
    
    
    (11,089
    )Ba
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    (3,607
    )C
    
    
    28,000
    
    
    
    (23,880
    )
    
    
    42,654
    
    
    
    (36,193
    )Total
    
    $
    31,682
    
    
    $
    (26,760
    )
    
    $
    67,654
    
    
    $
    (53,419
    )Credit Swaps Purchased-Single Name:A
    
    $
    (4,120
    )
    
    $
    25
    
    
    $
    (4,120
    )
    
    $
    536Baa
    
    
    
    
    
    
    
    
    
    
    (3,580
    )
    
    
    474Ba
    
    
    
    
    
    
    
    
    
    
    (4,040
    )
    
    
    1,689Ca
    
    
    (4,040
    )
    
    
    2,396
    
    
    
    
    
    
    
    Total
    
    $
    (8,160
    )
    
    $
    2,421
    
    
    $
    (11,740
    )
    
    $
    2,699
  78




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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 December 31, 2009
    
    
    December 31, 2008Notional
    
    
    Fair
    
    
    Notional
    
    
    FairMoodys Rating Category
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueBy Counterparty Buyer / (Seller)Credit Swaps Sold-Single Name:Aaa
    
    $
    10,000
    
    
    $
    (178
    )
    
    $
    2,411,228
    
    
    $
    (94,793
    )Aa
    
    
    9,764,609
    
    
    
    (134,586
    )
    
    
    11,930,958
    
    
    
    (573,250
    )A
    
    
    2,301,902
    
    
    
    (26,916
    )
    
    
    1,746,917
    
    
    
    (100,189
    )Baa
    
    
    75,000
    
    
    
    47
    
    
    
    
    
    
    
    Non rated
    
    
    1,216,408
    
    
    
    (28,042
    )
    
    
    1,388,843
    
    
    
    (77,992
    )Total
    
    $
    13,367,919
    
    
    $
    (189,675
    )
    
    $
    17,477,946
    
    
    $
    (846,224
    )Credit Swaps Sold-Tranche:Aa
    
    $
    3,650,000
    
    
    $
    (409,802
    )
    
    $
    4,550,000
    
    
    $
    (1,132,176
    )A
    
    
    450,000
    
    
    
    (65,882
    )
    
    
    450,000
    
    
    
    (144,341
    )Total
    
    $
    4,100,000
    
    
    $
    (475,684
    )
    
    $
    5,000,000
    
    
    $
    (1,276,517
    )CDS on ABS:Aa
    
    $
    5,000
    
    
    $
    (4,357
    )
    
    $
    43,494
    
    
    $
    (32,519
    )A
    
    
    21,682
    
    
    
    (18,023
    )
    
    
    19,160
    
    
    
    (17,093
    )Non rated
    
    
    5,000
    
    
    
    (4,380
    )
    
    
    5,000
    
    
    
    (3,807
    )Total
    
    $
    31,682
    
    
    $
    (26,760
    )
    
    $
    67,654
    
    
    $
    (53,419
    )Credit Swaps Purchased-Single Name:Aa
    
    $
    (8,160
    )
    
    $
    2,421
    
    
    $
    (11,740
    )
    
    $
    2,699Total
    
    $
    (8,160
    )
    
    $
    2,421
    
    
    $
    (11,740
    )
    
    $
    2,699
  79




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 December 31, 2009
    
    
    December 31, 2008Notional
    
    
    Fair
    
    
    Notional
    
    
    FairS&P Rating Category
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueBy Single Name Reference
Entity/TrancheCredit Swaps Sold-Single Name:AAA
    
    $
    347,963
    
    
    $
    (5,765
    )
    
    $
    555,812
    
    
    $
    (19,594
    )AA
    
    
    1,449,137
    
    
    
    (7,442
    )
    
    
    2,276,042
    
    
    
    (78,128
    )A
    
    
    5,656,180
    
    
    
    (11,217
    )
    
    
    6,984,696
    
    
    
    (200,543
    )BBB
    
    
    4,730,878
    
    
    
    (8,438
    )
    
    
    6,427,687
    
    
    
    (336,933
    )BB
    
    
    598,908
    
    
    
    (16,584
    )
    
    
    722,933
    
    
    
    (71,601
    )B
    
    
    189,284
    
    
    
    (2,726
    )
    
    
    289,246
    
    
    
    (71,219
    )CCC
    
    
    85,000
    
    
    
    (8,864
    )
    
    
    180,530
    
    
    
    (64,235
    )CC
    
    
    213,087
    
    
    
    (106,143
    )
    
    
    
    
    
    
    C
    
    
    
    
    
    
    
    
    
    
    35,000
    
    
    
    (3,189
    )D
    
    
    41,000
    
    
    
    (21,868
    )
    
    
    6,000
    
    
    
    (782
    )Non rated
    
    
    56,482
    
    
    
    (628
    )
    
    
    
    
    
    
    Total
    
    $
    13,367,919
    
    
    $
    (189,675
    )
    
    $
    17,477,946
    
    
    $
    (846,224
    )Credit Swaps Sold-Tranche:AAA
    
    $
    1,575,000
    
    
    $
    (120,112
    )
    
    $
    3,600,000
    
    
    $
    (738,361
    )AA
    
    
    1,275,000
    
    
    
    (122,406
    )
    
    
    450,000
    
    
    
    (144,341
    )A
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    (37,107
    )BBB
    
    
    750,000
    
    
    
    (103,601
    )
    
    
    500,000
    
    
    
    (187,384
    )BB
    
    
    100,000
    
    
    
    (12,997
    )
    
    
    200,000
    
    
    
    (80,599
    )B
    
    
    100,000
    
    
    
    (17,373
    )
    
    
    100,000
    
    
    
    (60,460
    )CCC
    
    
    200,000
    
    
    
    (45,393
    )
    
    
    50,000
    
    
    
    (28,265
    )C
    
    
    100,000
    
    
    
    (53,802
    )
    
    
    
    
    
    
    Total
    
    $
    4,100,000
    
    
    $
    (475,684
    )
    
    $
    5,000,000
    
    
    $
    (1,276,517
    )CDS on ABS:BBB
    
    $
    3,682
    
    
    $
    (2,880
    )
    
    $
    15,000
    
    
    $
    (10,828
    )BB
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    (6,727
    )B
    
    
    5,000
    
    
    
    (4,357
    )
    
    
    10,000
    
    
    
    (6,597
    )CCC
    
    
    13,000
    
    
    
    (10,534
    )
    
    
    10,000
    
    
    
    (7,747
    )CC
    
    
    10,000
    
    
    
    (8,989
    )
    
    
    22,654
    
    
    
    (21,520
    )Total
    
    $
    31,682
    
    
    $
    (26,760
    )
    
    $
    67,654
    
    
    $
    (53,419
    )Credit Swaps Purchased-Single Name:A
    
    $
    (4,120
    )
    
    $
    25
    
    
    $
    (4,120
    )
    
    $
    536BBB
    
    
    
    
    
    
    
    
    
    
    (7,620
    )
    
    
    2,163CC
    
    
    (4,040
    )
    
    
    2,396
    
    
    
    
    
    
    
    Total
    
    $
    (8,160
    )
    
    $
    2,421
    
    
    $
    (11,740
    )
    
    $
    2,699
  80




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 December 31, 2009
    
    
    December 31, 2008Notional
    
    
    Fair
    
    
    Notional
    
    
    FairS&P Rating Category
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueBy Counterparty Buyer / (Seller)Credit Swaps Sold-Single Name:AA
    
    $
    3,263,322
    
    
    $
    (25,340
    )
    
    $
    7,620,037
    
    
    $
    (350,248
    )A
    
    
    8,888,189
    
    
    
    (136,293
    )
    
    
    8,469,066
    
    
    
    (417,984
    )Non rated
    
    
    1,216,408
    
    
    
    (28,042
    )
    
    
    1,388,843
    
    
    
    (77,992
    )Total
    
    $
    13,367,919
    
    
    $
    (189,675
    )
    
    $
    17,477,946
    
    
    $
    (846,224
    )Credit Swaps Sold-Tranche:AA
    
    $
    1,850,000
    
    
    $
    (199,745
    )
    
    $
    2,850,000
    
    
    $
    (640,545
    )A
    
    
    1,800,000
    
    
    
    (210,057
    )
    
    
    2,150,000
    
    
    
    (635,972
    )BBB
    
    
    450,000
    
    
    
    (65,882
    )
    
    
    
    
    
    
    Total
    
    $
    4,100,000
    
    
    $
    (475,684
    )
    
    $
    5,000,000
    
    
    $
    (1,276,517
    )CDS on ABS:A
    
    $
    26,682
    
    
    $
    (22,380
    )
    
    $
    62,654
    
    
    $
    (49,612
    )Non rated
    
    
    5,000
    
    
    
    (4,380
    )
    
    
    5,000
    
    
    
    (3,807
    )Total
    
    $
    31,682
    
    
    $
    (26,760
    )
    
    $
    67,654
    
    
    $
    (53,419
    )Credit Swaps Purchased-Single Name:A
    
    $
    (8,160
    )
    
    $
    2,421
    
    
    $
    (11,740
    )
    
    $
    2,699Total
    
    $
    (8,160
    )
    
    $
    2,421
    
    
    $
    (11,740
    )
    
    $
    2,699
  81




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  December 31, 2009
    
    
    December 31, 2008Notional
    
    
    Fair
    
    
    Notional
    
    
    FairCountry of Domicile
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueCredit Swaps Sold-Single NameBy Reference Entity:North America
    
    $
    6,836,087
    
    
    $
    (161,513
    )
    
    $
    9,135,739
    
    
    $
    (481,009
    )Europe
    
    
    5,869,832
    
    
    
    (24,249
    )
    
    
    7,456,207
    
    
    
    (314,651
    )Asia-Pacific
    
    
    522,000
    
    
    
    (3,714
    )
    
    
    707,000
    
    
    
    (38,839
    )Others
    
    
    140,000
    
    
    
    (199
    )
    
    
    179,000
    
    
    
    (11,725
    )Total
    
    $
    13,367,919
    
    
    $
    (189,675
    )
    
    $
    17,477,946
    
    
    $
    (846,224
    )By Counterparty:North America
    
    $
    6,359,144
    
    
    $
    (76,784
    )
    
    $
    8,872,732
    
    
    $
    (439,704
    )Europe
    
    
    6,891,775
    
    
    
    (111,894
    )
    
    
    8,463,214
    
    
    
    (401,245
    )Asia-Pacific
    
    
    117,000
    
    
    
    (997
    )
    
    
    132,000
    
    
    
    (5,203
    )Others
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    (72
    )Total
    
    $
    13,367,919
    
    
    $
    (189,675
    )
    
    $
    17,477,946
    
    
    $
    (846,224
    )Credit Swaps Sold -TrancheBy Counterparty:North America
    
    $
    600,000
    
    
    $
    (47,099
    )
    
    $
    600,000
    
    
    $
    (143,205
    )Europe
    
    
    3,500,000
    
    
    
    (428,585
    )
    
    
    4,400,000
    
    
    
    (1,133,312
    )Total
    
    $
    4,100,000
    
    
    $
    (475,684
    )
    
    $
    5,000,000
    
    
    $
    (1,276,517
    )CDS on ABSBy Reference Entity:North America
    
    $
    31,682
    
    
    $
    (26,760
    )
    
    $
    67,654
    
    
    $
    (53,419
    )Total
    
    $
    31,682
    
    
    $
    (26,760
    )
    
    $
    67,654
    
    
    $
    (53,419
    )By Counterparty:North America
    
    $
    21,682
    
    
    $
    (18,830
    )
    
    $
    38,494
    
    
    $
    (27,695
    )Europe
    
    
    10,000
    
    
    
    (7,930
    )
    
    
    29,160
    
    
    
    (25,724
    )Total
    
    $
    31,682
    
    
    $
    (26,760
    )
    
    $
    67,654
    
    
    $
    (53,419
    )Credit Swaps Purchased-Single NameBy Reference Entity:North America
    
    $
    (8,160
    )
    
    $
    2,421
    
    
    $
    (11,740
    )
    
    $
    2,699Total
    
    $
    (8,160
    )
    
    $
    2,421
    
    
    $
    (11,740
    )
    
    $
    2,699By Counterparty:Europe
    
    $
    (8,160
    )
    
    $
    2,421
    
    
    $
    (11,740
    )
    
    $
    2,699Total
    
    $
    (8,160
    )
    
    $
    2,421
    
    
    $
    (11,740
    )
    
    $
    2,699
  82




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  December 31, 2009
    
    
    December 31, 2008Notional
    
    
    Fair
    
    
    Notional
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueCredit Swaps Sold-Single NameYear of Maturity2009
    
    $
    
    
    
    $
    
    
    
    $
    2,628,795
    
    
    $
    (43,412
    )2010
    
    
    5,435,860
    
    
    
    (24,057
    )
    
    
    5,815,475
    
    
    
    (231,783
    )2011
    
    
    2,510,612
    
    
    
    (101,066
    )
    
    
    2,770,195
    
    
    
    (187,662
    )2012
    
    
    4,394,718
    
    
    
    (69,285
    )
    
    
    5,106,916
    
    
    
    (325,565
    )2013
    
    
    1,026,729
    
    
    
    4,733
    
    
    
    1,156,565
    
    
    
    (57,802
    )Total
    
    $
    13,367,919
    
    
    $
    (189,675
    )
    
    $
    17,477,946
    
    
    $
    (846,224
    )Credit Swaps Sold-TrancheYear of Maturity2012
    
    $
    375,000
    
    
    $
    (13,350
    )
    
    $
    1,000,000
    
    
    $
    (70,593
    )2013
    
    
    200,000
    
    
    
    (71,175
    )
    
    
    350,000
    
    
    
    (167,083
    )2014
    
    
    3,525,000
    
    
    
    (391,159
    )
    
    
    3,650,000
    
    
    
    (1,038,841
    )Total
    
    $
    4,100,000
    
    
    $
    (475,684
    )
    
    $
    5,000,000
    
    
    $
    (1,276,517
    )CDS on ABSYear of Maturity2010
    
    $
    10,000
    
    
    $
    (8,989
    )
    
    $
    10,000
    
    
    $
    (6,597
    )2011
    
    
    16,682
    
    
    
    (14,199
    )
    
    
    5,000
    
    
    
    (4,491
    )2012
    
    
    5,000
    
    
    
    (3,572
    )
    
    
    14,160
    
    
    
    (10,742
    )2013
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    (12,002
    )2014
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    (11,554
    )2016
    
    
    
    
    
    
    
    
    
    
    8,494
    
    
    
    (8,033
    )Total
    
    $
    31,682
    
    
    $
    (26,760
    )
    
    $
    67,654
    
    
    $
    (53,419
    )Credit Swaps Purchased-Single
NameYear of Maturity2014
    
    $
    (8,160
    )
    
    $
    2,421
    
    
    $
    (11,740
    )
    
    $
    2,699Total
    
    $
    (8,160
    )
    
    $
    2,421
    
    
    $
    (11,740
    )
    
    $
    2,699
  83




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 5. Financial Instruments and Fair Value Disclosures
 Fair Value Measurements and Disclosures Fair Value Measurements and Disclosures
   
    
    Level 1  Valuations based on unadjusted quoted prices in active markets for identical
assets or liabilities.
  
    
    Level 2  Valuations based on quoted prices in markets that are not considered to be
active; or valuations for which all significant inputs are observable or can be
corroborated by observable market data, either directly or indirectly.
  
    
    Level 3  Valuations based on significant unobservable inputs that are supported by
little or no market activity.
   84




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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, which are used to derive a fair value of credit swaps. The valuation
models have been internally developed but are benchmarked against market-standard models.
    
    Consideration of the 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.
    
    Fair value estimates 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 pricing service. The independent pricing service obtains
mid-market credit swap premium quotes from a number of dealers in the credit swap market
across a range of standard maturities and restructuring terms, and computes composite
credit swap premium quotes on specific Reference Entities. The inputs to the valuation
model include: current credit swap premium quotes on the Reference Entities, estimated
recovery rates on each Reference Entities, 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 pricing service
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, the valuation model uses expected cash flows on the underlying
securities obtained from an independent valuation service and quotes from credit swap
counterparties. The cash flow data is used as input to an ABS valuation model to obtain
mid-market valuations. The mid-market valuations are adjusted to obtain exit price
valuations.
 
  85




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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 CLO investments, the fair value is based upon a valuation model which includes
observable inputs, where available. The model calculates the present value of expected
cash flows using estimates of key portfolio assumptions, including forecasted credit
losses, prepayment rates, forward yield curves and discount rates commensurate with the
risk involved.
 Nonperformance Risk Adjustment
 Fair Value Measurements and Disclosures,
  December 31,
    
    
    December 31,2009
    
    
    2008Unrealized loss on credit swaps, at fair
value, without nonperformance risk
adjustments
    
    $
    906,382
    
    
    $
    3,427,076Nonperformance risk adjustments
    
    
    (214,477
    )
    
    
    (1,253,615
    )Unrealized loss on credit swaps, at fair
value, after nonperformance risk
adjustments
    
    $
    691,905
    
    
    $
    2,173,461
  86




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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  Years Ended December 31,2009
    
    
    2008Net credit swap revenue (loss) without
nonperformance risk adjustments
    
    $
    2,494,940
    
    
    $
    (2,942,487
    )Nonperformance risk adjustments
    
    
    (1,039,138
    )
    
    
    1,253,615Net credit swap revenue (loss) after
nonperformance risk adjustments
    
    $
    1,455,802
    
    
    $
    (1,688,872
    )
  Quoted Prices in
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significantfor
    
    
    Observable
    
    
    Unobservable
    
    
    TotalIdentical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    Assets / Liabilities(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    at Fair 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
  Quoted Prices in
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significantfor
    
    
    Observable
    
    
    Unobservable
    
    
    TotalIdentical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    Assets / Liabilities(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    at Fair ValueAssetsCash and cash equivalents
    
    $
    243,909
    
    
    $
    37,003
    
    
    $
    
    
    
    $
    280,912Investments
    
    
    
    
    
    
    482,134
    
    
    
    4,736
    
    
    
    486,870Other assets
    
    
    
    
    
    
    7,813
    
    
    
    
    
    
    
    7,813Total Assets
    
    $
    243,909
    
    
    $
    526,950
    
    
    $
    4,736
    
    
    $
    775,595LiabilitiesUnrealized loss on credit swaps
    
    $
    
    
    
    $
    
    
    
    $
    2,173,461
    
    
    $
    2,173,461Total Liabilities
    
    $
    
    
    
    $
    
    
    
    $
    2,173,461
    
    
    $
    2,173,461
  87




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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  Year Ended
    
    
    Year EndedDecember 31, 2009
    
    
    December 31, 2008UnrealizedGain on CreditSwaps
    
    
    Investments
    
    
    InvestmentsBalance, beginning of period
    
    $
    
    
    
    $
    4,736
    
    
    $
    9,657Realized gains (losses)
    
    
    
    
    
    
    2,063
    
    
    
    (11,884
    )Unrealized gains (losses)
    
    
    2,207
    
    
    
    1,056
    
    
    
    2,411Purchases, sales, issuances and settlements
    
    
    
    
    
    
    (6,511
    )
    
    
    4,552Balance, end of period
    
    $
    2,207
    
    
    $
    1,344
    
    
    $
    4,736
     Year Ended
    
    
    Year EndedDecember 31, 2009
    
    
    December 31, 2008Unrealized Loss
    
    
    
    
    
    
    Unrealized Loss onon Credit Swaps
    
    
    Other Liabilities
    
    
    Credit SwapsBalance, beginning of period
    
    $
    (2,173,461
    )
    
    $
    
    
    
    $
    (368,739
    )Realized gains (losses)
    
    
    113,077
    
    
    
    
    
    
    
    (12,215
    )Unrealized gains (losses)
    
    
    1,368,479
    
    
    
    (2,828
    )
    
    
    (948,981
    )Purchases, sales, issuances and
settlements
    
    
    
    
    
    
    (2,642
    )
    
    
    Transfers in and/or out of Level 3, net
    
    
    
    
    
    
    
    
    
    
    (843,526
    )Balance, end of period
    
    $
    (691,905
    )
    
    $
    (5,470
    )
    
    $
    (2,173,461
    )
    88




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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  Financial Instruments Not Measured at Fair Value
  Fair Value Option
 Financial Instruments, Financial Instruments, Financial Instruments, Financial Instruments
 6. Credit Events and Terminations of Credit Swaps
  Years Ended December 31,2009
    
    
    2008
    
    
    2007Realized losses on single name credit swaps
    
    $
    (68,590
    )
    
    $
    (150,469
    )
    
    $
    (4,082
    )Realized losses on CDS on ABS
    
    
    (34,540
    )
    
    
    (12,216
    )
    
    
    Realized losses on tranches
    
    
    (9,947
    )
    
    
    
    
    
    
    Total realized losses
    
    $
    (113,077
    )
    
    $
    (162,685
    )
    
    $
    (4,082
    )
 Portfolio Repositioning Transactions
    89




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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
    Credit Events on Credit Swaps Sold Single Name
   Credit Events on CDS on ABS
    90




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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  7. Counterparty Default  LBSF
  8. CypressTree Acquisition
    Business Combinations
  91




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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 Intangibles  Goodwill and Other
  Net Book ValueFair Value at
    
    
    Accumulated
    
    
    at December 31,July 9, 2009
    
    
    Amortization
    
    
    2009Management contract rights
    
    $
    3,600
    
    
    $
    171
    
    
    $
    3,429Non-compete agreements
    
    
    800
    
    
    
    134
    
    
    
    666Total other intangible assets
    
    $
    4,400
    
    
    $
    305
    
    
    $
    4,095
  2010
    
    $
    6102011
    
    
    6102012
    
    
    4762013
    
    
    3432014
    
    
    343thereafter
    
    
    1,713Total
    
    $
    4,095
  Years EndedDecember 31,2009
    
    
    2008Pro forma revenues (losses)
    
    $
    1,515,586
    
    
    $
    (1,648,136
    )Pro forma net income (loss) available to common shares
    
    
    1,457,438
    
    
    
    (1,717,903
    )Proforma earnings (loss) per common share:Pro forma basic earnings (loss) per common share
    
    $
    36.31
    
    
    $
    (38.41
    )Pro forma diluted earnings (loss) per common share
    
    $
    35.19
    
    
    $
    (38.41
    )
  92




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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 9. Variable Interest Entities
     10. Fixed Assets and Internal Use Software Costs
  December 31,2009
    
    
    2008Asset categoryFurniture and fixtures
    
    $
    1,247
    
    
    $
    1,173Computers
    
    
    1,049
    
    
    
    998Office and telephone equipment
    
    
    192
    
    
    
    167Leasehold improvements
    
    
    2,043
    
    
    
    2,043Internal use software costs
    
    
    
    
    
    
    15,0684,531
    
    
    
    19,449Less accumulated depreciation and amortization
    
    
    2,693
    
    
    
    16,141Total fixed assets and internal use software costs
    
    $
    1,838
    
    
    $
    3,308
  93




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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  11. Long-Term Debt
 7% Senior Notes
    $125 million Subordinated Deferrable Interest Notes
    94




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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 $75 million Subordinated Deferrable Interest Notes
     12. Income Taxes
     95




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
      Years Ended December 31,2009
    
    
    2008
    
    
    2007Current:Federal
    
    $
    36
    
    
    $
    
    
    
    $
    State/City
    
    
    40
    
    
    
    50
    
    
    
    52Foreign
    
    
    109
    
    
    
    11
    
    
    
    Total current
    
    
    185
    
    
    
    61
    
    
    
    52Deferred:Federal
    
    
    
    
    
    
    
    
    
    
    State/City
    
    
    
    
    
    
    
    
    
    
    Foreign
    
    
    
    
    
    
    
    
    
    
    Total deferred
    
    
    
    
    
    
    
    
    
    
    Total provision for income taxes
    
    $
    185
    
    
    $
    61
    
    
    $
    52
  96




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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
   Years Ended December 31,2009
    
    
    2008
    
    
    2007U.S. federal income tax provision on
Primus Asset Managements taxable
income
    
    $
    36
    
    
    $
    
    
    
    $
    U.S. state and local tax provision
    
    
    40
    
    
    
    50
    
    
    
    52Foreign
    
    
    109
    
    
    
    11
    
    
    
    Total provision for income taxes
    
    $
    185
    
    
    $
    61
    
    
    $
    52
     December 31,2009
    
    
    2008Deferred tax assetsCapitalized and pre-operating formation costs
    
    $
    12
    
    
    $
    Share-based compensation
    
    
    4,657
    
    
    
    4,115Net operating losses
    
    
    5,275
    
    
    
    5,543Depreciation
    
    
    410
    
    
    
    156Other
    
    
    3,597
    
    
    
    16Gross deferred tax asset
    
    
    13,951
    
    
    
    9,830
  97




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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 December 31,2009
    
    
    2008Deferred tax liabilityOther
    
    
    1,296
    
    
    
    Depreciation
    
    
    
    
    
    
    Gross deferred tax liability
    
    
    1,296
    
    
    
    Net deferred tax asset
    
    
    12,655
    
    
    
    9,830Valuation allowance
    
    
    (12,655
    )
    
    
    (9,830
    )Net deferred tax asset after valuation allowance
    
    $
    
    
    
    $
    
  December 31,2009
    
    
    2008Balance at beginning of period
    
    $
    9,830
    
    
    $
    8,421Capitalized and pre-operating costs
    
    
    12
    
    
    
    Share-based compensation
    
    
    542
    
    
    
    1,058Tax depreciation / other
    
    
    2,539
    
    
    
    138Net operating loss
    
    
    (268
    )
    
    
    213Balance at end of period
    
    $
    12,655
    
    
    $
    9,830
 13. Preferred Securities of Subsidiary
        98




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  14. Shareholders Equity
  15. Earnings per Share
  Years Ended December 31,(in thousands, except per share data)
    
    2009
    
    
    2008
    
    
    2007Net earnings (loss) available to
common shares
    
    $
    1,460,280
    
    
    $
    (1,716,146
    )
    
    $
    (563,541
    )Weighted-average basic shares
outstanding
    
    
    40,142
    
    
    
    44,722
    
    
    
    44,808Effect of dilutive instruments:Restricted share units
    
    
    1,272
    
    
    
    
    
    
    
    Dilutive potential shares
    
    
    1,272
    
    
    
    
    
    
    
    Weighted average diluted shares
outstanding
    
    
    41,414
    
    
    
    44,722
    
    
    
    44,808Basic EPS
    
    $
    36.38
    
    
    $
    (38.37
    )
    
    $
    (12.58
    )Diluted EPS
    
    $
    35.26
    
    
    $
    (38.37
    )
    
    $
    (12.58
    )
  16. Commitments and Contingencies
 Leases
    99




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  2010
    
    $
    1,8372011
    
    
    1,8622012
    
    
    1,6942013
    
    
    1,1562014
    
    
    1,1562015 and thereafter
    
    
    2,023Total
    
    $
    9,728
  Statutory Requirements
  17. Employee Share-Based Compensation Plans
  Incentive Compensation Plans
   Share Options
   100




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
   Years Ended December 31,2009
    
    
    2008
    
    
    2007Risk free interest rate
    
    
    N/A
    
    
    
    N/A
    
    
    
    5.32
    %Volatility
    
    
    N/A
    
    
    
    N/A
    
    
    
    32.8
    %Expected dividend yield
    
    
    N/A
    
    
    
    N/A
    
    
    
    0.00
    %Expected option life
    
    
    N/A
    
    
    
    N/A
    
    
    7 yearsWeighted average fair value of
options
    
    
    N/A
    
    
    
    N/A
    
    
    $
    3.73
  2009
    
    
    2008
    
    
    2007Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber
    
    
    Average
    
    
    Number
    
    
    Average
    
    
    Number
    
    
    Averageof
    
    
    Exercise
    
    
    of
    
    
    Exercise
    
    
    of
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at beginning of year
    
    
    1,225,549
    
    
    $
    11.59
    
    
    
    1,311,624
    
    
    $
    11.61
    
    
    
    858,158
    
    
    $
    11.18Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    847,607
    
    
    $
    11.70Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (67,968
    )
    
    $
    8.20Forfeited
    
    
    (340,985
    )
    
    $
    11.97
    
    
    
    (86,075
    )
    
    $
    11.88
    
    
    
    (326,173
    )
    
    $
    11.41Outstanding at end of year
    
    
    884,564
    
    
    $
    11.45
    
    
    
    1,225,549
    
    
    $
    11.59
    
    
    
    1,311,624
    
    
    $
    11.61Exercisable at end of year
    
    
    644,908
    
    
    $
    11.29
    
    
    
    621,451
    
    
    $
    11.32
    
    
    
    332,438
    
    
    $
    10.85
  Options Outstanding
    
    
    Options ExercisableAverage
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedNumber
    
    
    Remaining
    
    
    Average
    
    
    Aggregate
    
    
    Number
    
    
    Average
    
    
    Aggregateof
    
    
    Contractual
    
    
    Exercise
    
    
    Intrinsic
    
    
    of
    
    
    Exercise
    
    
    IntrinsicRange of Exercise Prices
    
    Shares
    
    
    Life (Years)
    
    
    Price
    
    
    Value
    
    
    Shares
    
    
    Price
    
    
    Value$6.94
    
    
    65,625
    
    
    
    3.1
    
    
    $
    6.94
    
    
    
    
    
    
    
    65,625
    
    
    $
    6.94
    
    
    
    $6.95 - $9.76
    
    
    113,125
    
    
    
    4.1
    
    
    $
    9.76
    
    
    
    
    
    
    
    113,125
    
    
    $
    9.76
    
    
    
    $9.77 - $13.50
    
    
    705,814
    
    
    
    3.4
    
    
    $
    12.13
    
    
    
    
    
    
    
    466,158
    
    
    $
    12.28
    
    
    
    Total
    
    
    884,564
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    644,908
    
    
    
    
    
    
    
    
  101




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 Performance Shares
    Share Units
   WeightedNumber
    
    
    Averageof
    
    
    Grant dateShares
    
    
    Fair ValueUnvested at December 31, 2008
    
    
    1,611,352
    
    
    $
    5.03Granted
    
    
    1,873,474
    
    
    $
    1.88Vested
    
    
    (856,705
    )
    
    $
    4.22Forfeited
    
    
    (80,612
    )
    
    $
    5.54Unvested at December 31, 2009
    
    
    2,547,509
    
    
    $
    2.70
   102




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 18. Dividend Restrictions
    19. Interest Rate Swap Agreement
  20. Subsequent Events
   21. Quarterly Operating Results (unaudited)
 (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 per share
    
    $
    2.61
    
    
    $
    14.76
    
    
    $
    11.54
    
    
    $
    7.51Diluted earnings per share
    
    $
    2.61
    
    
    $
    14.46
    
    
    $
    11.14
    
    
    $
    7.21
  103




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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 (in thousands)
    
    First
    
    
    Second
    
    
    Third
    
    
    Fourth2008:
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterTotal net revenues (losses)
    
    $
    (653,356
    )
    
    $
    278,297
    
    
    $
    (380,515
    )
    
    $
    (905,705
    )Operating income (loss)
    
    
    (670,029
    )
    
    
    262,603
    
    
    
    (390,207
    )
    
    
    (918,452
    )Net income (loss) available to
common shares
    
    
    (670,078
    )
    
    
    262,603
    
    
    
    (390,219
    )
    
    
    (918,452
    )Basic earnings (loss) per share
    
    $
    (14.85
    )
    
    $
    5.81
    
    
    $
    (8.63
    )
    
    $
    (21.20
    )Diluted earnings (loss) per share
    
    $
    (14.85
    )
    
    $
    5.78
    
    
    $
    (8.63
    )
    
    $
    (21.20
    )
  104




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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 22. Primus Guaranty, Ltd.   Standalone Financial Statements
 Primus Guaranty, Ltd.
Statements of Financial Condition
 December 31,(in thousands)
    
    2009
    
    
    2008AssetsCash and cash equivalents
    
    $
    12,513
    
    
    $
    42,909Available-for-sale investments
    
    
    26,004
    
    
    
    21,248Accrued interest receivable
    
    
    320
    
    
    
    396Prepaid expenses
    
    
    1,629
    
    
    
    1,518Intercompany receivable
    
    
    1,098
    
    
    
    558Intercompany loans
    
    
    11,742
    
    
    
    11,742Debt issuance costs, net
    
    
    2,976
    
    
    
    3,587Other assets
    
    
    2,893
    
    
    
    7,813Total assets
    
    
    59,175
    
    
    
    89,771Liabilities and shareholders equityAccounts payable
    
    $
    232
    
    
    $
    391Interest payable
    
    
    
    
    
    
    54Long-term debt
    
    
    96,451
    
    
    
    117,535Intercompany payable
    
    
    341
    
    
    
    5Losses of subsidiaries in excess of investments
    
    
    304,700
    
    
    
    1,774,742Total liabilities
    
    
    401,724
    
    
    
    1,892,727Common shares
    
    
    3,061
    
    
    
    3,263Additional paid-in-capital
    
    
    280,685
    
    
    
    281,596Accumulated other comprehensive income
    
    
    2,148
    
    
    
    908Retained earnings (deficit)
    
    
    (628,443
    )
    
    
    (2,088,723
    )Total shareholders equity (deficit)
    
    
    (342,549
    )
    
    
    (1,802,956
    )Total liabilities and shareholders equity
    
    $
    59,175
    
    
    $
    89,771
  105




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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)
    
    2009
    
    
    2008
    
    
    2007RevenuesInterest income
    
    $
    1,001
    
    
    $
    2,285
    
    
    $
    5,157Intercompany interest income
    
    
    984
    
    
    
    1,014
    
    
    
    Gain on retirement of long-term debt
    
    
    8,174
    
    
    
    9,716
    
    
    
    Other income, net
    
    
    18
    
    
    
    
    
    
    
    Total revenues
    
    
    10,177
    
    
    
    13,015
    
    
    
    5,157ExpensesIntercompany expenses *
    
    
    5,239
    
    
    
    4,761
    
    
    
    7,687Share compensation
    
    
    317
    
    
    
    371
    
    
    
    367Interest expense
    
    
    2,974
    
    
    
    6,874
    
    
    
    8,458Professional and legal fees
    
    
    2,820
    
    
    
    1,288
    
    
    
    809Other
    
    
    398
    
    
    
    705
    
    
    
    374Total expenses
    
    
    11,748
    
    
    
    13,999
    
    
    
    17,695Loss before equity in earnings (loss) of subsidiaries
    
    
    (1,571
    )
    
    
    (984
    )
    
    
    (12,538
    )Equity in earnings (loss) of subsidiaries, net of tax
    
    
    1,461,851
    
    
    
    (1,715,162
    )
    
    
    (551,003
    )Net income (loss)
    
    $
    1,460,280
    
    
    $
    (1,716,146
    )
    
    $
    (563,541
    )
 *
    
    Charges for services provided by subsidiaries under modified intercompany service agreement.  106




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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)
    
    2009
    
    
    2008
    
    
    2007Cash flows from operating activities:Net income (loss)
    
    $
    1,460,280
    
    
    $
    (1,716,146
    )
    
    $
    (563,541
    )Adjustments to reconcile net income (loss) to net cash used in
operating activities:Share-based compensation
    
    
    4,728
    
    
    
    4,611
    
    
    
    3,748Amortization of debt issuance costs
    
    
    113
    
    
    
    143
    
    
    
    146Net amortization of premium and discount on
securities
    
    
    131
    
    
    
    (218
    )
    
    
    Change in accumulated comprehensive (income) loss
of subsidiaries
    
    
    (236
    )
    
    
    4,792
    
    
    
    (2,337
    )Gain on retirement of long-term debt
    
    
    (8,173
    )
    
    
    (9,716
    )
    
    
    Equity in subsidiaries (earnings) loss, net of tax
    
    
    (1,461,851
    )
    
    
    1,715,162
    
    
    
    551,003Increase (decrease) in cash resulting from changes in:Intercompany receivables/payables and loans
    
    
    (204
    )
    
    
    2,403
    
    
    
    (16,032
    )Accrued interest receivable
    
    
    76
    
    
    
    (396
    )
    
    
    Prepaid expenses and other assets
    
    
    (1,167
    )
    
    
    (1,081
    )
    
    
    (234
    )Accounts payable
    
    
    (159
    )
    
    
    77
    
    
    
    4Interest payable
    
    
    (54
    )
    
    
    (55
    )
    
    
    12Net cash used in operating activities
    
    
    (6,516
    )
    
    
    (424
    )
    
    
    (27,231
    )Cash flows from investing activities:Purchases of available-for-sale investments
    
    
    (20,566
    )
    
    
    (28,861
    )
    
    
    Maturities and sales of available-for-sale investments
    
    
    17,154
    
    
    
    6,567
    
    
    
    Net return from (investment in) subsidiaries
    
    
    (3,679
    )
    
    
    3,808
    
    
    
    (21,810
    )Net cash used in investing activities
    
    
    (7,091
    )
    
    
    (18,486
    )
    
    
    (21,810
    )Cash flows from financing activities:Payments for retirement of long-term debt
    
    
    (6,437
    )
    
    
    (5,057
    )
    
    
    Purchase and retirement of common shares
    
    
    (10,352
    )
    
    
    (3,579
    )
    
    
    (1,170
    )Proceeds from exercise of warrants
    
    
    
    
    
    
    
    
    
    
    7,335Proceeds from exercise of options
    
    
    
    
    
    
    
    
    
    
    557Net cash provided by (used in) financing activities
    
    
    (16,789
    )
    
    
    (8,636
    )
    
    
    6,722Net decrease in cash
    
    
    (30,396
    )
    
    
    (27,546
    )
    
    
    (42,319
    )Cash and cash equivalents at beginning of year
    
    
    42,909
    
    
    
    70,455
    
    
    
    112,774Cash and cash equivalents at end of year
    
    $
    12,513
    
    
    $
    42,909
    
    
    $
    70,455
  107




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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
      108




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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
  (a)Number of
    
    
    
    
    
    
    (c)Securities to be
    
    
    (b)
    
    
    Number of SecuritiesIssued upon
    
    
    Weighted-Average
    
    
    Remaining Available forExercise of
    
    
    Exercise Price of
    
    
    Future Issuance Under EquityOutstanding
    
    
    Outstanding
    
    
    Compensation Plans (ExcludingOptions, Warrants
    
    
    Options, Warrants
    
    
    Securities Reflected inPlan Category
    
    and Rights
    
    
    and Rights
    
    
    Column (a)Share Awards(1) (2)
    
    
    2,364,510Options
    
    
    884,564
    
    
    $
    11.45Equity compensation plans approved
by security holders
    
    
    3,249,074
    
    
    
    
    
    
    
    6,322,440Equity compensation plans not approved
by security holders (3)
    
    
    408,000
    
    
    
    
    
    
    
    408,000Total
    
    
    3,657,074
    
    
    
    
    
    
    
    5,914,440
 (1)
    
    Includes share units and performance shares, assuming target performance.(2)
    
    Includes 141,974 shares issued to directors in January 2010 as compensation for their board service for 2009.(3)
    
    Includes 378,000 share units granted in 2009 with respect to newly hired employees in connection with the
Companys acquisition of CypressTree Investment Management, LLP.
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accountant Fees and Services
   109




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##### Table of Contents



Part IV.
 
 Item. 15 Exhibits and Financial Statement Schedules
         110




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##### Table of Contents



Index to Exhibits
 Number
    
    Exhibit3.1
    
    Memorandum of Association (Incorporated by reference to Exhibit 3.1 to the S-1 dated
July 23, 2004)3.2
    
    Bye-laws (Incorporated by reference to Exhibit 3.2 to the S-1/A dated June 10, 2004)4.1
    
    Specimen Common Share Certificate (Incorporated by reference to Exhibit 4.1 to the
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)10.1
    
    Amended and Restated Employment Agreement with Thomas W. Jasper, dated June 13, 2008
(Incorporated by reference to Exhibit 10.1 to Form 8-K filed on June 17, 2008)10.2
    
    Employment Letter with Richard Claiden, dated October 20, 2003 (Incorporated by
reference to Exhibit 10.3 to the S-1/A dated June 10, 2004)10.3
    
    Form of Registration Rights Agreement by and among the Registrant and the
signatories thereto (Incorporated by reference to Exhibit 10.4 to the S-1/A dated
June 10, 2004)10.4
    
    Primus Guaranty, Ltd. Share Incentive Plan (Incorporated by reference to Exhibit
10.5 to the S-1 dated April 26, 2004)10.5
    
    Primus Guaranty, Ltd. 2004 Share Incentive Plan (Incorporated by reference to
Exhibit 10.5 to the Form 10-K filed on March 14, 2008)10.6
    
    Primus Guaranty, Ltd. Annual Performance Bonus Plan (Incorporated by reference to
Exhibit 10.7 to the S-1 dated April 26, 2004)10.7
    
    Primus Guaranty, Ltd. Senior Management Severance Pay Plan, (As amended through July
30, 2008) (Incorporated by reference to Exhibit 10.7 to the Form 10-K filed on March
16, 2009)10.8
    
    Office Lease Agreement, dated July 25, 2002, between Madison 45 LLC and Primus
Financial Products, LLC (Incorporated by reference to Exhibit 10.9 to the S-1 dated
April 26, 2004)10.9
    
    Form of Indemnification Agreement between Primus Guaranty, Ltd. and each of its
directors and officers (Incorporated by reference to Exhibit 10.11 to the S-1/A
dated June 10, 2004)10.10
    
    Indemnification Agreement, dated September 22, 2004, between Primus Guaranty, Ltd.
and XL Capital Ltd. (Incorporated by reference to Exhibit 10.12 to the S-1/A dated
September 24, 2004)10.11
    
    Primus Guaranty, Ltd. Restricted Share Unit Deferral Plan effective December 31,
2007 and amended on December 29, 2008 (Incorporated by reference to Exhibit 10.11 to
the Form 10-K file on March 16, 2009)10.12
    
    Primus Guaranty, Ltd. Incentive Compensation Plan (including amendments through
January 28, 2009) (Incorporated by reference to Exhibit 10.12 to the Form 10-K filed
on March 16, 2009)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
  111




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##### Table of Contents



SIGNATURES
  PRIMUS GUARANTY, LTD.
(Registrant)By:
    /s/ Thomas W. JasperThomas W. JasperChief Executive Officer  Power of Attorney
   Signature
    
    Title
    
    Date/s/ Thomas W. Jasper

Thomas W. Jasper
    
    Chief Executive Officer and Director
(Principal Executive Officer)
    
    March 16, 2010/s/ Richard Claiden

Richard Claiden
    
    Chief Financial Officer
(Principal Financial and
Accounting Officer)
    
    March 16, 2010/s/ Michael P. Esposito, Jr.

Michael P. Esposito, Jr.
    
    Director and Chairman of the Board
    
    March 16, 2010/s/ David E. Czerniecki

David E. Czerniecki
    
    Director
    
    March 16, 2010/s/ Frank P. Filipps

Frank P. Filipps
    
    Director
    
    March 16, 2010/s/ Paul S. Giordano

Paul S. Giordano
    
    Director
    
    March 16, 2010
  112




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Signature
    
    Title
    
    Date/s/ Thomas J. Hartlage

Thomas J. Hartlage
    
    Director
    
    March 16, 2010/s/ Robert R. Lusardi

Robert R. Lusardi
    
    Director
    
    March 16, 2010/s/ James H. MacNaughton

James H. MacNaughton
    
    Director
    
    March 16, 2010/s/ John A. Ward, III

John A. Ward, III
    
    Director
    
    March 16, 2010
  113