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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, 2008
 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
 Yes o No þ
 Yes o No þ
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
(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, 2008
 INDEX
 PagePart I.Item 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    19Item 1B. Unresolved Staff Comments
    
    
    28Item 2. Properties
    
    
    28Item 3. Legal Proceedings
    
    
    28Item 4. Submission of Matters to a Vote of Security Holders
    
    
    28Part II.Item 5. Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
    
    
    29Item 6. Selected Financial Data
    
    
    31Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    33Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    63Item 8. Financial Statements and Supplementary Data
    
    
    64Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    110Item 9A. Controls and Procedures
    
    
    110Item 9B. Other Information
    
    
    110Part III.Item 10. Directors, Executive Officers and Corporate Governance
    
    
    111Item 11. Executive Compensation
    
    
    111Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
    
    
    112Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    112Item 14. Principal Accountant Fees and Services
    
    
    112Part IV.Item 15. Exhibits and Financial Statement Schedules
    
    
    113Signatures
    
    
    115Exhibit 10.7Exhibit 10.11Exhibit 10.12Exhibit 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 requires otherwise, references to we, us, our,
Company, or Primus refer to the consolidated operations of Primus Guaranty, Ltd., or Primus
Guaranty, and references to a company name refer solely to such company.
 Overview
     3




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Legal Entity Structure
 
 Primus Financial
 .
   4




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Credit and Risk Management Policies and Oversight-Primus Financial
  Capital Models and Verification Process
  Bankruptcy Remoteness and Governance of Primus Financial
  Credit Swap Portfolio-Primus Financial
     5




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Counterparties
    6




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Primus Asset Management
   Primus Guaranty (UK)
  Primus Re
  Other Subsidiaries
  Recent Developments
   7




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
    
    Counterparties ceased to purchase new credit swap protection from Primus
Financial after the first quarter of 2008. As a result, Primus Financial has changed
its strategy from a growth model to an amortization model. Under the amortization
model, Primus Financials existing credit swap contracts will expire at maturity
(unless terminated early) and it is not expected that new credit swap contracts will
be added to the portfolio;
 
    
    Primus Financials ratings were downgraded by S&P and Moodys, principally as a
result of two factors: a) realized losses from credit events on Reference Entities
within Primus Financials credit swap portfolio, which reduced its available
capital; and b) credit rating downgrades on a number of Reference Entities within
Primus Financials credit swap portfolio; and
 
    
    On February 24, 2009, Moodys announced that it has withdrawn Primus Financials
counterparty rating and debt ratings of Primus Financial, at the request of Primus
Financial.
    
    
    Amortizing Primus Financials credit swap portfolio;
 
    
    Pursuing new opportunities in credit, structured credit and derivative markets;
and
 
    
    Aligning costs with our business approach.
  Risk Management Policies and Oversight
  Investments and Investment Policy
    8




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Technology
  Competition
 .
   Credit Ratings  Primus Debt and Preferred Securities
      Employees
   9




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Additional Information
 www.primusguaranty.com
  Certain Bermuda Law Considerations
      10




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The Bermuda Insurance Act.
  Primus Re, Ltd. Act 2000.
  11




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Notification by shareholder controller of new or increased control.
 Objection to existing shareholder controller.
 TAX CONSIDERATIONS
   Taxation of Shareholders
 Bermuda Taxation
  U.S. Taxation
   12




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U.S. Holders
   Passive Foreign Investment Companies
    13




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www.primusguaranty.com.
  14




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Alternative Characterizations.
  Non-U.S. Holders
   15




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Taxation of Primus Guaranty and Its Subsidiaries
 Bermuda Taxation
 Primus Guaranty, Primus Bermuda and Primus Re.
 U.S. Taxation
 Primus Guaranty, Primus Bermuda, Primus Financial and PGUK.
   16




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17




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Primus Asset Management.
   Primus Re.
 Personal Holding Company Tax and Accumulated Earnings Tax.
 Backup Withholding
  18




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Item 1A. Risk Factors
 Risks Related to Our Business and Operations
 General economic conditions have continued to deteriorate and we are now in the midst of a
global recession. These conditions likely will cause further deterioration in corporate balance
sheets, ratings downgrades and additional business failures, resulting in continued disruptions in
the financial markets.
  We are experiencing unprecedented conditions in the global financial and credit markets which
create a greater level of risk to our business and may materially adversely affect our loss
experience, the demand for our services and our financial results.
   19




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We face risks in Primus Financials credit protection business from its credit swaps sold on
issuers in industries under severe stress, such as financial intermediaries, insurance companies,
building/development, retailers, publishers and as well as brokers/dealers/investment houses.
    The failure to manage effectively the risk of credit losses would have a material adverse
effect on our financial condition and results of operations.
   20




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Primus Financials counterparties are primarily global financial institutions and major credit
swap dealers. Some of these institutions have been under significant stress which has impacted
their balance sheets, capital ratios and ratings. A default by a major counterparty could have a
material impact on Primus Financial and consequently on us.
  We are at risk to further deterioration in the credit markets and additional credit events in
Primus Financials tranche portfolio as well as its single name credit swap portfolio.
  As a result of the disruption in the credit markets and our inability to grow Primus
Financials credit swap portfolio, management has decided to change its strategy and there can be
no assurance that our new business plans will be effective or profitable.
    21




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We may have difficulty in servicing our outstanding debt and may require additional capital in
the future, which may not be available on favorable terms or at all.
   22




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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 successfully implement our strategic plan
or operate our business.
  Variations in market credit swap premiums and correlation levels could cause our financial
results to be volatile.
  Certain of our principal shareholders control us and the barriers to a change in control are
very low.
   23




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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.
  Our operations may become subject to increased regulation under U.S. federal and state law or
existing regulations may change, which may result in administrative burdens, increased costs or
other adverse consequences for us.
   24




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Our common shares may be de-listed from the NYSE.
     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.
   25




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We are highly dependent on information systems and third-party service providers.
  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.
   26




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If the IRS successfully challenges the treatment Primus Financial has adopted for its credit
swap transactions, the timing and character of taxable income recognized by Primus Financial could
be adversely affected.
  Risks Related to Our Status as a Bermuda Company
 It may be difficult to effect service of process and enforcement of judgments against us and
our officers and directors .
  U.S. persons who own our common shares may have more difficulty in protecting their interests
than U.S. persons who are shareholders of a U.S. corporation.
   27




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We may become subject to taxes in Bermuda after 2016, which may have a material adverse effect
on our financial condition and operating results.
  The Organization for Economic Cooperation and Development and the European Union
considerations.
   
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
   28




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Part II.
 
 Item 5. Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
 Market Information
  Year ended December 31, 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
 Year ended December 31, 2007
    
    High
    
    
    Low
    
    
    CloseFirst Quarter
    
    $
    12.92
    
    
    $
    10.69
    
    
    $
    12.30Second Quarter
    
    $
    12.96
    
    
    $
    10.65
    
    
    $
    10.72Third Quarter
    
    $
    11.30
    
    
    $
    7.36
    
    
    $
    10.52Fourth Quarter
    
    $
    11.55
    
    
    $
    5.51
    
    
    $
    7.01
 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
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    25,000,000November (a)
    
    
    3,542,028
    
    
    $
    0.69
    
    
    
    3,542,028
    
    
    $
    22,556,001December
    
    
    947,955
    
    
    $
    0.89
    
    
    
    947,955
    
    
    $
    21,712,321Total
    
    
    4,489,983
    
    
    $
    0.73
    
    
    
    4,489,983
 (a)
    
    During November 2008, approximately 3.1 million shares were acquired in a private 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 for purchases of our 7% Senior Notes of
approximately $5.1 million during the quarter ended December 31, 2008.  29




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Securities Authorized for Issuance under Equity Compensation Plans
 Form 10-K.
 Shareholder Information
  Dividend and Distribution Information
   Performance Graph
  
 Cumulative Total Return9/30/04
    
    
    12/31/04
    
    
    12/31/05
    
    
    12/31/06
    
    
    12/31/07
    
    
    12/31/08Primus Guaranty, Ltd.
    
    $
    100.00
    
    
    $
    121.42
    
    
    $
    96.67
    
    
    $
    85.55
    
    
    $
    51.92
    
    
    $
    8.44S&P Small Cap 600 Index
    
    $
    100.00
    
    
    $
    113.01
    
    
    $
    121.69
    
    
    $
    140.09
    
    
    $
    139.29
    
    
    $
    96.00Russell 1000 Financial Sector
    
    $
    100.00
    
    
    $
    109.10
    
    
    $
    116.48
    
    
    $
    138.22
    
    
    $
    114.93
    
    
    $
    56.19
  30




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Item 6. Selected Financial Data
  Years Ended December 31,(in thousands, except per share data)
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Consolidated Statement of Operations:Revenues:Net credit swap revenue (loss) (1)
    
    $
    (1,688,872
    )
    
    $
    (535,064
    )
    
    $
    116,083
    
    
    $
    23,106
    
    
    $
    47,729Premiums earned on financial guarantees
    
    
    
    
    
    
    
    
    
    
    400
    
    
    
    405
    
    
    
    395Asset management and advisory fees
    
    
    4,052
    
    
    
    3,481
    
    
    
    1,263
    
    
    
    190
    
    
    
    15Interest income
    
    
    26,586
    
    
    
    41,847
    
    
    
    28,374
    
    
    
    16,047
    
    
    
    4,850Gain on retirement of long-term debt
    
    
    9,716
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Impairment loss on available-for-sale
investments
    
    
    (11,896
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other trading revenue (loss)
    
    
    (402
    )
    
    
    (2,689
    )
    
    
    1,770
    
    
    
    
    
    
    
    Foreign currency revaluation income
(loss)
    
    
    (463
    )
    
    
    (107
    )
    
    
    (26
    )
    
    
    (1,546
    )
    
    
    726Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40Total revenues (losses)
    
    $
    (1,661,279
    )
    
    $
    (492,532
    )
    
    $
    147,864
    
    
    $
    38,202
    
    
    $
    53,755Expenses:Compensation and employee benefits
    
    $
    16,370
    
    
    $
    22,450
    
    
    $
    21,512
    
    
    $
    15,935
    
    
    $
    17,801Interest expense
    
    
    17,032
    
    
    
    20,729
    
    
    
    10,849
    
    
    
    2,660
    
    
    
    881Other expenses
    
    
    14,762
    
    
    
    20,210
    
    
    
    14,887
    
    
    
    11,613
    
    
    
    9,204Total expenses
    
    $
    48,164
    
    
    $
    63,389
    
    
    $
    47,248
    
    
    $
    30,208
    
    
    $
    27,886Distributions on preferred securities of
subsidiary
    
    $
    6,642
    
    
    $
    7,568
    
    
    $
    5,683
    
    
    $
    3,865
    
    
    $
    2,138Income (loss) before provision (benefit)
for income taxes
    
    $
    (1,716,085
    )
    
    $
    (563,489
    )
    
    $
    94,933
    
    
    $
    4,129
    
    
    $
    23,731Provision (benefit) for income tax
    
    
    61
    
    
    
    52
    
    
    
    42
    
    
    
    46
    
    
    
    46Net income (loss)
    
    $
    (1,716,146
    )
    
    $
    (563,541
    )
    
    $
    94,891
    
    
    $
    4,083
    
    
    $
    23,685Basic earnings (loss) per share
    
    $
    (38.37
    )
    
    $
    (12.58
    )
    
    $
    2.19
    
    
    $
    0.09
    
    
    $
    1.44Diluted earnings (loss) per share
    
    $
    (38.37
    )
    
    $
    (12.58
    )
    
    $
    2.13
    
    
    $
    0.09
    
    
    $
    0.59Weighted average number of common shares
outstanding:Basic
    
    
    44,722
    
    
    
    44,808
    
    
    
    43,306
    
    
    
    43,150
    
    
    
    16,486Diluted
    
    
    44,722
    
    
    
    44,808
    
    
    
    44,472
    
    
    
    44,645
    
    
    
    40,256(1)    Net credit swap revenue (loss) consists of the following:Net premiums earned
    
    $
    102,515
    
    
    $
    84,771
    
    
    $
    69,408
    
    
    $
    52,705
    
    
    $
    42,475Net realized gains (losses) on
credit swaps
    
    
    (161,957
    )
    
    
    (5,190
    )
    
    
    (1,769
    )
    
    
    (5,162
    )
    
    
    5,522Net unrealized gains (losses) on
credit swaps
    
    
    (1,629,430
    )
    
    
    (614,645
    )
    
    
    48,444
    
    
    
    (24,437
    )
    
    
    (268
    )Total net credit swap revenue (loss)
    
    $
    (1,688,872
    )
    
    $
    (535,064
    )
    
    $
    116,083
    
    
    $
    23,106
    
    
    $
    47,729
  31




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As of December 31,Balance Sheet Data:
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004AssetsCash and cash equivalents
    
    $
    280,912
    
    
    $
    242,665
    
    
    $
    204,428
    
    
    $
    69,355
    
    
    $
    320,989Available-for-sale investments
    
    
    482,930
    
    
    
    617,631
    
    
    
    584,911
    
    
    
    560,147
    
    
    
    161,101Unrealized gain on swaps, at fair value
    
    
    
    
    
    
    606
    
    
    
    73,330
    
    
    
    25,342
    
    
    
    46,517Fixed assets and software costs, net
    
    
    3,308
    
    
    
    5,036
    
    
    
    5,510
    
    
    
    4,993
    
    
    
    6,097Other assets
    
    
    27,081
    
    
    
    22,708
    
    
    
    34,289
    
    
    
    13,245
    
    
    
    8,014Total assets
    
    $
    794,231
    
    
    $
    888,646
    
    
    $
    902,468
    
    
    $
    673,082
    
    
    $
    542,718Liabilities and shareholders equity (deficit)Unrealized loss on swaps, at fair value
    
    $
    2,173,461
    
    
    $
    544,731
    
    
    $
    2,931
    
    
    $
    3,521
    
    
    $
    259Long-term debt
    
    
    317,535
    
    
    
    325,904
    
    
    
    325,000
    
    
    
    200,000
    
    
    
    75,000Other liabilities
    
    
    7,670
    
    
    
    12,952
    
    
    
    13,925
    
    
    
    9,189
    
    
    
    7,941Total liabilities
    
    $
    2,498,666
    
    
    $
    883,587
    
    
    $
    341,856
    
    
    $
    212,710
    
    
    $
    83,200Preferred securities of subsidiary
    
    $
    98,521
    
    
    $
    98,521
    
    
    $
    98,521
    
    
    $
    98,521
    
    
    $
    98,521Shareholders equity (deficit)Common shares
    
    $
    3,263
    
    
    $
    3,603
    
    
    $
    3,470
    
    
    $
    3,454
    
    
    $
    3,422Additional paid-in-capital
    
    
    281,596
    
    
    
    280,224
    
    
    
    269,420
    
    
    
    265,966
    
    
    
    264,973Warrants
    
    
    
    
    
    
    
    
    
    
    612
    
    
    
    612
    
    
    
    612Accumulated other comprehensive income
(loss)
    
    
    908
    
    
    
    (4,712
    )
    
    
    (2,375
    )
    
    
    (4,254
    )
    
    
    Retained earnings (deficit)
    
    
    (2,088,723
    )
    
    
    (372,577
    )
    
    
    190,964
    
    
    
    96,073
    
    
    
    91,990Total shareholders equity (deficit)
    
    $
    (1,802,956
    )
    
    $
    (93,462
    )
    
    $
    462,091
    
    
    $
    361,851
    
    
    $
    360,997Total liabilities, preferred securities of
subsidiary and shareholders equity (deficit)
    
    $
    794,231
    
    
    $
    888,646
    
    
    $
    902,468
    
    
    $
    673,082
    
    
    $
    542,718Per Share Data:Book value per share(1)
    
    $
    (44.21
    )
    
    $
    (2.08
    )
    
    $
    10.65
    
    
    $
    8.38
    
    
    $
    8.44
 
 (1)
    
    Book value per share is based on total shareholders equity (deficit) divided by basic common
shares outstanding.  32




---



##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following is a discussion and analysis of our financial condition and results of
operations. This discussion should be read in conjunction with our consolidated financial
statements and accompanying notes, which appear elsewhere in this Annual Report on Form 10-K . This
discussion contains forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in these forward-looking statements as a
result of various factors, including those discussed below and elsewhere in this Annual Report on
Form 10-K, particularly in the Risk Factors section and under the heading Cautionary Note
Regarding Forward-Looking Statements.
 Index to Managements Discussion and Analysis of Financial Condition and Results of Operations
 Index
    
    PageBusiness Introduction
    
    
    33Executive Overview
    
    
    342009 Trends and Business Outlook
    
    
    36Critical Accounting Policies
    
    
    37Results of Operations
    
    
    41Income Taxes
    
    
    57Non-GAAP Financial Measures  Economic Results
    
    
    57CLO Transactions
    
    
    58Liquidity and Capital Resources
    
    
    60Off-Balance Sheet Arrangements
    
    
    61Contractual Obligations
    
    
    61Recent Accounting Pronouncements
    
    
    62
 
 Business Introduction
  Primus Financial
    33




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##### Table of Contents



Primus Asset Management
   PRS Trading / Harrier
   
 Executive Overview
    34




---



##### Table of Contents



Primus Financial
  
    
    Counterparties ceased to purchase new credit swap protection from Primus
Financial after the first quarter of 2008. As a result, Primus Financial has changed
its strategy from a growth model to an amortization model. Under the amortization
model, Primus Financials existing credit swap contracts will expire at maturity
(unless terminated early) and it is not expected that new credit swap contracts will
be added to the portfolio;
 
    
    Primus Financials ratings were downgraded by S&P and Moodys, principally as a
result of two factors: a) realized losses from credit events on Reference Entities
within Primus Financials credit swap portfolio, which reduced its available
capital; and b) credit rating downgrades on a number of Reference Entities within
Primus Financials credit swap portfolio; and
 
    
    On February 24, 2009, Moodys announced that it has withdrawn Primus Financials
counterparty rating and debt ratings of Primus Financial, at the request of Primus
Financial.
 Counterparty capacity
  Credit events
  Credit ratings
   35




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##### Table of Contents



Primus Asset Management
  
 2009 Trends and Business Outlook
   
    
    Increased defaults in and additional write-downs of credit assets;
 
    
    Further consolidation of major banks and credit swap dealers;
 
    
    Increased credit default swap market regulations; and
 
    
    One or more credit default swap clearinghouses.
   36




---



##### Table of Contents




    
    Amortizing Primus Financials credit swap portfolio;
 
    
    Pursuing new opportunities in credit, structured credit and derivative markets;
and
 
    
    Aligning costs with our business approach.
    
 Critical Accounting Policies
   Valuation of Financial Instruments
 Fair Value Measurements
  37




---



##### Table of Contents




    
    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.
   38




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##### Table of Contents



Nonperformance Risk Adjustment
  Level 3 Assets and Liabilities
   Quoted Prices in
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significant
    
    
    Assets /for
    
    
    Observable
    
    
    Unobservable
    
    
    LiabilitiesIdentical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    at Fair(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    ValueTotal assets
    
    $
    243,909
    
    
    $
    526,950
    
    
    $
    4,736
    
    
    $
    775,595Percentage of total
assets measured at
fair value
    
    
    31.4
    %
    
    
    68.0
    %
    
    
    0.6
    %
    
    
    100
    %Total liabilities
    
    $
    
    
    
    $
    
    
    
    $
    2,173,461
    
    
    $
    2,173,461Percentage of total
liabilities
measured at fair
value
    
    
    
    
    
    
    
    
    
    
    100
    %
    
    
    100
    %
 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.
  39




---



##### 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 the credit risk of Primus Financials counterparties, as well as its
own nonperformance risk. SFAS No. 157 requires that nonperformance risk be considered when
determining the fair value of Primus Financials 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 inputs to the valuation model
include: current credit swap premium quotes obtained from an independent pricing service
on the Reference Entities, estimated recovery rates on Reference Entities, current
interest rates and foreign exchange rates. 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 average credit
swap premium quotes on specific Reference Entities. Primus Financial adjusts the
independent mid-market credit swap premium quotes to derive estimated exit price
valuations.
    
    For tranche credit swaps, Primus Financial calculates a mid-market valuation 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 interest rates market and correlation
levels derived from credit swap indices. Primus Financial adjusts the mid-market
valuations obtained from the model to estimated exit price valuations, using mid-market to
exit price quotes obtained from tranche counterparties.
    
    For CDS on ABS, Primus Financial obtains expected cash flows on the underlying
securities from an independent valuation service and quotes from Primus Financials
counterparties. Primus Financial uses the cash flow data as input to a CDS on ABS
valuation model to obtain mid-market valuations. Primus Financial adjusts the mid-market
valuations to obtain exit price valuations.
 
  40




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##### Table of Contents



Valuation Techniques  Other Financial Instruments
  
    
    For cash and cash equivalents, which include deposits in banks and money market
accounts, the fair value of these instruments is based upon quoted market prices. We do
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 two 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. The valuations are benchmarked to third-party quotes.
 Share-Based Employee Compensation Plans
 Share-Based
Payment
  
 Results of Operations
 Introduction
    41




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##### Table of Contents



Year Ended December 31, 2008 Compared With Year Ended December 31, 2007
 Overview of Financial Results
       Net Credit Swap Loss
   42




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##### Table of Contents



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
    )
 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.
  43




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##### Table of Contents



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
    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
    )
   44




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##### Table of Contents



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
 CDS on ABS
     45




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##### Table of Contents



Counterparty Default  Lehman Brothers Special Financing Inc.
  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
    )
  46




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##### Table of Contents



Asset Management and Advisory Fees
    Interest Income
   December 31,2008
    
    
    2007Interest income
    
    $
    26,586
    
    
    $
    41,847Cash and cash equivalents
    
    $
    280,912
    
    
    $
    242,665Available-for-sale securities
    
    
    482,930
    
    
    
    617,631Total cash, cash equivalents and available-for-sale securities
    
    $
    763,842
    
    
    $
    860,296
  47




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##### Table of Contents



Gain on Retirement of Long-Term Debt
  Impairment Loss on Available-for-Sale Investments
  Other Trading Revenue (Loss)
  Foreign Currency Revaluation 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
  48




---



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Interest Expense and Preferred Distributions
      49




---



##### Table of Contents



Income Taxes
  Year Ended December 31, 2007 Compared With Year Ended December 31, 2006
 Overview
        50




---



##### Table of Contents



Consolidated Net Credit Swap Revenue (Loss)
   Years EndedDecember 31,2007
    
    
    2006Primus Financial
    
    $
    (530,369
    )
    
    $
    116,651PRS Trading/Harrier
    
    
    (4,695
    )
    
    
    (568
    )Total consolidated net credit swap revenue (loss)
    
    $
    (535,064
    )
    
    $
    116,083
   Net Credit Swap Revenue  Primus Financial
  
    
    Net premiums earned;
 
    
    Net realized gains (losses) on credit swaps; and
 
    
    Net unrealized gains (losses) on credit swaps.
   51




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##### Table of Contents



Years EndedDecember 31,2007
    
    
    2006Net premiums earned
    
    $
    84,576
    
    
    $
    69,446Net realized losses on credit swaps
    
    
    (394
    )
    
    
    (1,496
    )Net unrealized gains (losses) on credit swaps
    
    
    (614,551
    )
    
    
    48,701Total net credit swap revenue (loss)
    
    $
    (530,369
    )
    
    $
    116,651
 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 31,2007
    
    
    2006Premium income on single name credit swaps sold
    
    $
    70,788
    
    
    $
    66,824Premium income on tranches sold
    
    
    13,075
    
    
    
    2,619Premium income on CDS on ABS
    
    
    739
    
    
    
    3Net premium expense on credit swaps undertaken
to offset credit risk
    
    
    (26
    )
    
    
    Total net premiums earned
    
    $
    84,576
    
    
    $
    69,446
     52




---



##### Table of Contents



Net
Realized Gains (Losses) on Credit Swaps  Primus Financial
  Years EndedDecember 31,2007
    
    
    2006Realized gains on terminated credit swaps sold
    
    $
    3,688
    
    
    $
    2,002Realized losses on terminated credit swaps sold
    
    
    (3,784
    )
    
    
    (3,498
    )Net realized losses on terminated credit swaps
undertaken to offset credit risk
    
    
    (298
    )
    
    
    Total net realized losses on credit swaps
    
    $
    (394
    )
    
    $
    (1,496
    )
  Net Unrealized Gains (Losses) on Credit Swaps  Primus Financial
  Years EndedDecember 31,2007
    
    
    2006Net unrealized gains (losses) on credit swaps sold
    
    $
    (248,914
    )
    
    $
    52,437Net unrealized losses on tranches sold
    
    
    (317,028
    )
    
    
    (3,713
    )Net unrealized losses on CDS on ABS
    
    
    (48,658
    )
    
    
    (23
    )Net unrealized gains on credit swaps undertaken to
offset credit risk
    
    
    49
    
    
    
    Total net unrealized gains (losses) on credit swaps
    
    $
    (614,551
    )
    
    $
    48,701
  53




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Asset Management and Advisory Fees
    Interest Income
    Years EndedDecember 31,2007
    
    
    2006Interest income
    
    $
    41,847
    
    
    $
    28,374Cash and cash equivalents
    
    $
    242,665
    
    
    $
    204,428Available-for-sale and trading account securities
    
    
    617,631
    
    
    
    599,448Total cash, cash equivalents, available-for-sale
and trading account securities
    
    $
    860,296
    
    
    $
    803,876
  54




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##### Table of Contents



Other
Trading Revenue (Loss
  Foreign
Currency Revaluation Loss
  Operating
Expenses
  Years EndedDecember 31,2007
    
    
    2006Compensation and employee benefits
    
    $
    22,450
    
    
    $
    21,512Professional and legal fees
    
    
    4,948
    
    
    
    5,147Depreciation and amortization
    
    
    1,748
    
    
    
    2,517Technology and data
    
    
    4,620
    
    
    
    2,427Other
    
    
    5,872
    
    
    
    4,796Total operating expenses
    
    $
    39,638
    
    
    $
    36,399Number of full-time employees, at end of period
    
    
    58
    
    
    
    52
      55




---



##### Table of Contents



Restructuring
Costs
  Interest
Expense and Preferred Distributions
     Income
Taxes
   56




---



##### Table of Contents



Income Taxes
  
 Non-GAAP Financial Measures  Economic Results
   
    
    Unrealized gains (losses) on credit swaps sold by Primus Financial are excluded from
GAAP net income (loss);
 
    
    Realized gains from early termination of credit swaps sold by Primus Financial are
excluded from GAAP net income (loss);
 
    
    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); and
 
    
    Provision for credit events. Commencing with the third quarter of 2008, we make
provisions for credit events only in the period in which the event occurs, a change from
our previous practice.
    57




---



##### Table of Contents



Years Ended December 31,2008
    
    
    2007
    
    
    2006GAAP net income (loss)
    
    $
    (1,716,146
    )
    
    $
    (563,541
    )
    
    $
    94,891Adjustments:Less: Change in unrealized fair
value of credit swaps sold (gain)
loss by Primus Financial
    
    
    1,629,432
    
    
    
    614,551
    
    
    
    (48,701
    )Less: Realized gains from early
termination of credit swaps sold
by Primus Financial
    
    
    (28
    )
    
    
    (3,463
    )
    
    
    (2,002
    )Add: Amortization of realized
gains from the early termination
of credit swaps sold by Primus
Financial
    
    
    2,173
    
    
    
    6,044
    
    
    
    7,098Less: Provision for credit events
    
    
    (9,328
    )
    
    
    (40,880
    )
    
    
    Add: Deduction against provision
for credit events
    
    
    12,216
    
    
    
    
    
    
    
    Net Economic Results
    
    $
    (81,681
    )
    
    $
    12,711
    
    
    $
    51,286Economic earnings per diluted share
    
    $
    (1.83
    )
    
    $
    0.28
    
    
    $
    1.15Economic weighted average common
shares outstanding  diluted
    
    
    44,722
    
    
    
    45,194
    
    
    
    44,472
  
 CLO Transactions
   Primus CLO I, Ltd.
   58




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##### Table of Contents



Primus CLO II, Ltd.
  Accounting for CLO Transactions
 Consolidation of Variable
Interest Entities
 Accounting for Certain Investments in Debt and Equity Securities Recognition of Interest Income and Impairment
on Purchased and Retained Beneficial Interests in Securitized Financial Assets, Amendments to the Impairment Guidance of EITF Issue No. 99-20
   59




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Liquidity and Capital Resources
 Capital Strategy
    Cash Flows
 Cash flows from operating activities
  Cash flows from investing activities
  Cash flows from financing activities
   60




---



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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
    
    $
    8,493
    
    
    $
    1,205
    
    
    $
    2,409
    
    
    $
    2,376
    
    
    $
    2,5037% Senior Notes
    
    
    109,723
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109,723Interest on 7%
Senior Notes (b)
    
    
    214,971
    
    
    
    7,681
    
    
    
    15,361
    
    
    
    15,361
    
    
    
    176,568Subordinated
deferrable interest
notes
    
    
    200,000
    
    
    
    
    (a)
    
    
    
    (a)
    
    
    
    (a)
    
    
    200,000Total
    
    $
    533,187
    
    
    $
    8,886
    
    
    $
    17,770
    
    
    $
    17,737
    
    
    $
    488,794
 (a)
    
    Payments on the subordinated deferrable interest notes for the next five years cannot be
determined, as the notes are auction rate obligations.(b)
    
    Net interest payments on the outstanding $109.7 million, 7% Senior Notes at December 31, 2008
will vary as a result of the interest rate swap agreement and our purchase program. Property leases:
 7% Senior Notes and Subordinated deferrable interest notes:
   61




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##### Table of Contents



Recent Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Liabilities
 Business Combinations
 Disclosures about Derivative Instruments and
Hedging Activities, an Amendment of FASB Statement No. 133 Accounting for Derivative Instruments and Hedging Activities
 Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133
and FASB Interpretation No. 45.
 Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active.
  62




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##### Table of Contents



Disclosures by Public
Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest
Entities.
 Amendments to the Impairment Guidance of
EITF Issue No. 99-20. Recognition of Interest Income and
Impairment of Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a
Transferor in Securitized Financial Asset, Accounting for Certain Investments in Debt and Equity Securities.
 
 Item 7A. Quantitative and Qualitative Disclosures about Market Risk
     63




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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
    
    
    65Managements Report on Internal Control over Financial
Reporting
    
    
    67Consolidated Statements of Financial Condition as of December 31, 2008
and 2007
    
    
    68Consolidated Statements of Operations for the years ended December 31,
2008, 2007 and 2006
    
    
    69Consolidated Statements of Shareholders Equity (Deficit) for the
years ended December 31, 2008, 2007 and 2006
    
    
    70Consolidated Statements of Cash Flows for the years ended December 31,
2008, 2007 and 2006
    
    
    71Notes to Consolidated Financial Statements
    
    
    72
   64




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65




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##### Table of Contents



66




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##### Table of Contents



/s/ Thomas W. Jasper
    
    
    
    /s/ Richard ClaidenThomas W. Jasper
    
    
    
    Richard ClaidenChief Executive Officer
    
    
    
    Chief Financial Officer
  67




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##### Table of Contents



Primus Guaranty, Ltd.
 
 Consolidated Statements of Financial Condition  (in thousands except share amounts)
 December 31,
    
    
    December 31,2008
    
    
    2007AssetsCash and cash equivalents
    
    $
    280,912
    
    
    $
    242,665Available-for-sale investments
    
    
    482,930
    
    
    
    617,631Trading account assets
    
    
    3,940
    
    
    
    Accrued interest receivable
    
    
    3,704
    
    
    
    7,684Accrued premiums and receivables on credit and other
swaps
    
    
    2,764
    
    
    
    4,187Unrealized gain on credit and other swaps, at fair value
    
    
    
    
    
    
    606Fixed assets and software costs, net
    
    
    3,308
    
    
    
    5,036Debt issuance costs, net
    
    
    6,153
    
    
    
    6,965Other assets
    
    
    10,520
    
    
    
    3,872Total assets
    
    $
    794,231
    
    
    $
    888,646Liabilities and shareholders equityAccounts payable and accrued expenses
    
    $
    1,737
    
    
    $
    2,182Accrued compensation
    
    
    1,768
    
    
    
    5,957Interest payable
    
    
    535
    
    
    
    831Unrealized loss on credit and other swaps, at fair value
    
    
    2,173,461
    
    
    
    544,731Accrued premiums and payables on credit and other swaps
    
    
    
    
    
    
    1,770Payable for credit events
    
    
    3,186
    
    
    
    Long-term debt
    
    
    317,535
    
    
    
    325,904Restructuring liabilities
    
    
    
    
    
    
    1,709Other liabilities
    
    
    444
    
    
    
    503Total liabilities
    
    
    2,498,666
    
    
    
    883,587Preferred securities of subsidiary
    
    
    98,521
    
    
    
    98,521Commitments and contingenciesShareholders equity (deficit)Common shares, $0.08 par value, 62,500,000 shares
authorized, 40,781,538 and 45,035,593 shares issued and
outstanding at December 31, 2008 and 2007
    
    
    3,263
    
    
    
    3,603Additional paid-in capital
    
    
    281,596
    
    
    
    280,224Accumulated other comprehensive income (loss)
    
    
    908
    
    
    
    (4,712
    )Retained earnings (deficit)
    
    
    (2,088,723
    )
    
    
    (372,577
    )Total shareholders equity (deficit)
    
    
    (1,802,956
    )
    
    
    (93,462
    )Total liabilities, preferred securities of
subsidiary and shareholders equity (deficit)
    
    $
    794,231
    
    
    $
    888,646
 See accompanying notes.
  68




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Primus Guaranty, Ltd.
 
 Consolidated Statements of Operations  (in thousands except per share amounts)
 Years Ended December 31,2008
    
    
    2007
    
    
    2006RevenuesNet credit swap revenue (loss)
    
    $
    (1,688,872
    )
    
    $
    (535,064
    )
    
    $
    116,083Premiums earned on financial guarantees
    
    
    
    
    
    
    
    
    
    
    400Asset management and advisory fees
    
    
    4,052
    
    
    
    3,481
    
    
    
    1,263Interest income
    
    
    26,586
    
    
    
    41,847
    
    
    
    28,374Gain on retirement of long-term debt
    
    
    9,716
    
    
    
    
    
    
    
    Impairment loss on available-for-sale investments
    
    
    (11,896
    )
    
    
    
    
    
    
    Other trading revenue (loss)
    
    
    (402
    )
    
    
    (2,689
    )
    
    
    1,770Foreign currency revaluation loss
    
    
    (463
    )
    
    
    (107
    )
    
    
    (26
    )Total net revenues (losses)
    
    
    (1,661,279
    )
    
    
    (492,532
    )
    
    
    147,864ExpensesCompensation and employee benefits
    
    
    16,370
    
    
    
    22,450
    
    
    
    21,512Professional and legal fees
    
    
    4,331
    
    
    
    4,948
    
    
    
    5,147Depreciation and amortization
    
    
    1,329
    
    
    
    1,748
    
    
    
    2,517Technology and data
    
    
    3,790
    
    
    
    4,620
    
    
    
    2,427Interest expense
    
    
    17,032
    
    
    
    20,729
    
    
    
    10,849Restructuring costs
    
    
    
    
    
    
    3,022
    
    
    
    Other
    
    
    5,312
    
    
    
    5,872
    
    
    
    4,796Total expenses
    
    
    48,164
    
    
    
    63,389
    
    
    
    47,248Distributions on preferred securities of subsidiary
    
    
    6,642
    
    
    
    7,568
    
    
    
    5,683Income (loss) before provision for income taxes
    
    
    (1,716,085
    )
    
    
    (563,489
    )
    
    
    94,933Provision for income taxes
    
    
    61
    
    
    
    52
    
    
    
    42Net income (loss) available to common shares
    
    $
    (1,716,146
    )
    
    $
    (563,541
    )
    
    $
    94,891Income (loss) per common share:Basic
    
    $
    (38.37
    )
    
    $
    (12.58
    )
    
    $
    2.19Diluted
    
    $
    (38.37
    )
    
    $
    (12.58
    )
    
    $
    2.13Average common shares outstanding:Basic
    
    
    44,722
    
    
    
    44,808
    
    
    
    43,306Diluted
    
    
    44,722
    
    
    
    44,808
    
    
    
    44,472
 See accompanying notes.
  69




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Primus Guaranty, Ltd.
 
 Consolidated Statements of Shareholders Equity (Deficit)  (in thousands)
 Years Ended December 31,2008
    
    
    2007
    
    
    2006Common sharesBalance at beginning of year
    
    $
    3,603
    
    
    $
    3,470
    
    
    $
    3,454Conversion of warrants to common shares
    
    
    
    
    
    
    113
    
    
    
    Shares purchased and retired
    
    
    (359
    )
    
    
    
    
    
    
    Shares vested under employee compensation plans
    
    
    19
    
    
    
    15
    
    
    
    12Issuance of common shares from exercise of options
    
    
    
    
    
    
    5
    
    
    
    4Balance at end of year
    
    
    3,263
    
    
    
    3,603
    
    
    
    3,470Additional paid-in-capitalBalance at beginning of year
    
    
    280,224
    
    
    
    269,420
    
    
    
    265,966Conversion of warrants to common shares
    
    
    
    
    
    
    7,834
    
    
    
    Shares purchased and retired
    
    
    (3,220
    )
    
    
    (1,316
    )
    
    
    (793
    )Shares vested under employee compensation plans
    
    
    4,592
    
    
    
    3,733
    
    
    
    3,642Issuance of common shares from exercise of options
    
    
    
    
    
    
    553
    
    
    
    605Balance at end of year
    
    
    281,596
    
    
    
    280,224
    
    
    
    269,420WarrantsBalance at beginning of year
    
    
    
    
    
    
    612
    
    
    
    612Conversion of warrants to common shares
    
    
    
    
    
    
    (612
    )
    
    
    Balance at end of year
    
    
    
    
    
    
    
    
    
    
    612Accumulated other comprehensive income (loss)Balance at beginning of year
    
    
    (4,712
    )
    
    
    (2,375
    )
    
    
    (4,254
    )Foreign currency translation adjustments
    
    
    (447
    )
    
    
    (18
    )
    
    
    203Change in unrealized holding gains (losses) on
available-for-sale securities
    
    
    6,067
    
    
    
    (2,319
    )
    
    
    1,676Balance at end of year
    
    
    908
    
    
    
    (4,712
    )
    
    
    (2,375
    )Retained earnings (deficit)Balance at beginning of year
    
    
    (372,577
    )
    
    
    190,964
    
    
    
    96,073Net income (loss)
    
    
    (1,716,146
    )
    
    
    (563,541
    )
    
    
    94,891Balance at end of year
    
    
    (2,088,723
    )
    
    
    (372,577
    )
    
    
    190,964Total shareholders equity (deficit) at end of year
    
    $
    (1,802,956
    )
    
    $
    (93,462
    )
    
    $
    462,091Comprehensive income (loss)Net income (loss)
    
    $
    (1,716,146
    )
    
    $
    (563,541
    )
    
    $
    94,891Foreign currency translation adjustments
    
    
    (447
    )
    
    
    (18
    )
    
    
    203Change in unrealized gains (losses) on
available-for-sale investments
    
    
    6,067
    
    
    
    (2,319
    )
    
    
    1,676Comprehensive income (loss)
    
    $
    (1,710,526
    )
    
    $
    (565,878
    )
    
    $
    96,770
 See accompanying notes.
  70




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Primus Guaranty, Ltd.
 
 Consolidated Statements of Cash Flows  (in thousands)
 Years Ended December 31,2008
    
    
    2007
    
    
    2006Cash flows from operating activitiesNet income (loss)
    
    $
    (1,716,146
    )
    
    $
    (563,541
    )
    
    $
    94,891Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Non-cash items included in net income (loss):Depreciation and amortization
    
    
    1,329
    
    
    
    1,748
    
    
    
    2,517Share compensation
    
    
    4,611
    
    
    
    3,748
    
    
    
    3,654Net unrealized (gain) loss on credit swap portfolio
    
    
    1,629,336
    
    
    
    614,524
    
    
    
    (48,578
    )Net amortization of premium and discount on
securities
    
    
    (2,240
    )
    
    
    (8,245
    )
    
    
    (4,243
    )Gain on retirement of long-term debt
    
    
    (9,716
    )
    
    
    
    
    
    
    Impairment loss on available-for-sale investments
    
    
    11,896
    
    
    
    
    
    
    
    Restructuring costs
    
    
    
    
    
    
    3,022
    
    
    
    Loss on disposal of assets
    
    
    1,101
    
    
    
    
    
    
    
    25Amortization of debt issuance costs
    
    
    307
    
    
    
    311
    
    
    
    166Distributions on preferred securities of subsidiary
    
    
    6,642
    
    
    
    7,568
    
    
    
    5,683Increase (decrease) in cash resulting from changes in:Accrued interest receivable
    
    
    3,980
    
    
    
    (1,310
    )
    
    
    (1,247
    )Accrued premiums and interest receivable on
credit and other swaps
    
    
    1,423
    
    
    
    (165
    )
    
    
    (561
    )Other assets
    
    
    261
    
    
    
    (1,205
    )
    
    
    (447
    )Trading account assets
    
    
    (3,940
    )
    
    
    14,537
    
    
    
    (14,537
    )Accounts payable and accrued expenses
    
    
    (445
    )
    
    
    (549
    )
    
    
    (81
    )Accrued compensation
    
    
    (4,189
    )
    
    
    (1,665
    )
    
    
    3,967Payable for credit events
    
    
    3,186
    
    
    
    
    
    
    
    Trading account liabilities
    
    
    
    
    
    
    (1,002
    )
    
    
    1,002Interest payable
    
    
    (296
    )
    
    
    206
    
    
    
    221Accrued premiums and payables on credit swaps
    
    
    (1,770
    )
    
    
    1,726
    
    
    
    Restructuring liabilities
    
    
    (1,709
    )
    
    
    (911
    )
    
    
    Other liabilities
    
    
    (59
    )
    
    
    (97
    )
    
    
    (273
    )Net cash provided by (used in) operating activities
    
    
    (76,438
    )
    
    
    68,700
    
    
    
    42,159Cash flows from investing activitiesFixed asset purchases and capitalized software costs
    
    
    (702
    )
    
    
    (2,805
    )
    
    
    (3,059
    )Cash receipts on CLO investments
    
    
    3,399
    
    
    
    981
    
    
    
    Purchases of available-for-sale and other investments
    
    
    (1,538,046
    )
    
    
    (743,752
    )
    
    
    (261,045
    )Maturities and sales of available-for-sale investments
    
    
    1,665,759
    
    
    
    715,977
    
    
    
    242,200Net cash provided by (used in) investing activities
    
    
    130,410
    
    
    
    (29,599
    )
    
    
    (21,904
    )Cash flows from financing activitiesRetirement of long-term debt
    
    
    (5,057
    )
    
    
    
    
    
    
    Purchase and retirement of common shares
    
    
    (3,579
    )
    
    
    (1,170
    )
    
    
    (793
    )Proceeds from employee exercise of share options
    
    
    
    
    
    
    557
    
    
    
    609Proceeds from exercise of warrants
    
    
    
    
    
    
    7,335
    
    
    
    Proceeds from issuance of debt
    
    
    
    
    
    
    
    
    
    
    125,000Debt issuance costs
    
    
    
    
    
    
    
    
    
    
    (4,518
    )Net preferred distributions of subsidiary
    
    
    (6,642
    )
    
    
    (7,568
    )
    
    
    (5,683
    )Net cash provided by (used in) financing activities
    
    
    (15,278
    )
    
    
    (846
    )
    
    
    114,615Net effect of exchange rate changes on cash
    
    
    (447
    )
    
    
    (18
    )
    
    
    203Net increase (decrease) in cash
    
    
    38,247
    
    
    
    38,237
    
    
    
    135,073Cash and cash equivalents at beginning of year
    
    
    242,665
    
    
    
    204,428
    
    
    
    69,355Cash and cash equivalents at end of year
    
    $
    280,912
    
    
    $
    242,665
    
    
    $
    204,428Supplemental disclosuresCash paid for interest
    
    $
    16,897
    
    
    $
    20,212
    
    
    $
    10,461Cash paid for taxes
    
    
    46
    
    
    
    53
    
    
    
    90
 See accompanying notes.
  71




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##### Table of Contents



Primus
Guaranty, Ltd.
 
 Notes to Consolidated Financial Statements
 1. Organization and Business
         72




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 2. Summary of Significant Accounting Policies
 Basis of Presentation
  Disclosures about Segments of an
Enterprise and Related Information.
   Use of Estimates
  Cash and Cash Equivalents
  Investments
 Accounting for Certain Investments in Debt and Equity
Securities Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets .
   Interest Income
   73




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 Other trading revenue (loss)
  Credit Swaps
 Accounting for Derivative Instruments and Hedging
Activities Amendment of Statement
133 on Derivative Instruments and Hedging Activities
  Foreign Currency Translation
  Variable Interest Entities
 Consolidation of Variable Interest Entities .
   74




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  Property, Plant and Equipment
  Internal Use Software Costs
 Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use
 Deferred Debt Issuance Costs
  Income Taxes
 Accounting
for Income Taxes
 Share-Based Compensation
 Share-Based Payment
   75




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 Recent Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Liabilities
 Business Combinations
 Disclosures about Derivative Instruments and
Hedging Activities, an Amendment of FASB Statement No. 133 Accounting for Derivative Instruments and Hedging Activities
 Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133
and FASB Interpretation No. 45
 Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active
  76




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 Disclosures by Public
Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest
Entities
 Amendments to the Impairment Guidance of
EITF Issue No. 99-20. Accounting for Certain Investments in Debt and Equity Securities.
 3. Cash and Cash Equivalents
  4. Available-for-Sale Investments
 .
  December 31, 2008Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueU.S. government agency
obligations
    
    $
    458,909
    
    
    $
    2,016
    
    
    $
    (39
    )
    
    $
    460,886Collateralized loan
obligations
    
    
    791
    
    
    
    
    
    
    
    
    
    
    
    791Corporate debt
securities
    
    
    22,076
    
    
    
    84
    
    
    
    (912
    )
    
    
    21,248ABS
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5Total
    
    $
    481,781
    
    
    $
    2,100
    
    
    $
    (951
    )
    
    $
    482,930
  77




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 December 31, 2007Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueU.S. government agency
obligations
    
    $
    607,663
    
    
    $
    480
    
    
    $
    (169
    )
    
    $
    607,974Collateralized loan
obligations
    
    
    14,880
    
    
    
    
    
    
    
    (5,223
    )
    
    
    9,657Total
    
    $
    622,543
    
    
    $
    480
    
    
    $
    (5,392
    )
    
    $
    617,631
  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
    )
 December 31, 2007Securities 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
    
    $
    127,139
    
    
    $
    (59
    )
    
    $
    104,600
    
    
    $
    (110
    )
    
    $
    231,739
    
    
    $
    (169
    )Collateralized loan obligations
    
    
    5,302
    
    
    
    (3,065
    )
    
    
    4,355
    
    
    
    (2,158
    )
    
    
    9,657
    
    
    
    (5,223
    )Total
    
    $
    132,441
    
    
    $
    (3,124
    )
    
    $
    108,955
    
    
    $
    (2,268
    )
    
    $
    241,396
    
    
    $
    (5,392
    )
   78




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  5. Net Credit Swap Revenue (Loss) and Portfolio
 Overview
       79




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
   Primus Financial
     PRS Trading / Harrier
   80




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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 31,2008
    
    
    2007
    
    
    2006Net premium income
    
    $
    102,515
    
    
    $
    84,771
    
    
    $
    69,408Net realized losses
    
    
    (161,957
    )
    
    
    (5,190
    )
    
    
    (1,769
    )Net change in unrealized gains (losses)
    
    
    (1,629,430
    )
    
    
    (614,645
    )
    
    
    48,444Net credit swap revenue (loss)
    
    $
    (1,688,872
    )
    
    $
    (535,064
    )
    
    $
    116,083
   December 31,
    
    
    December 31,2008
    
    
    2007Gross Notional Amounts:Credit swaps sold-single name
    
    $
    17,477,946
    
    
    $
    18,260,653Credit swaps sold-tranche
    
    
    5,000,000
    
    
    
    4,700,000CDS on ABS
    
    
    67,654
    
    
    
    80,000Credit swaps purchased-single name
    
    
    (11,740
    )
    
    
    (25,410
    )Fair value:Asset
    
    
    
    
    
    
    606Liability
    
    
    2,173,461
    
    
    
    544,731Average fair value:Asset
    
    
    495
    
    
    
    33,217Liability
    
    
    1,321,799
    
    
    
    165,087
   81




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  December 31, 2008
    
    
    December 31, 2007Notional
    
    
    Fair
    
    
    Notional
    
    
    FairMoodys Rating Category
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueBy Single Name Reference
Entity/TrancheCredit Swaps Sold-Single Name:Aaa
    
    $
    525,812
    
    
    $
    (19,442
    )
    
    $
    828,504
    
    
    $
    (3,953
    )Aa
    
    
    2,815,912
    
    
    
    (83,984
    )
    
    
    3,832,904
    
    
    
    (91,863
    )A
    
    
    5,825,968
    
    
    
    (162,262
    )
    
    
    6,047,762
    
    
    
    (36,544
    )Baa
    
    
    6,629,514
    
    
    
    (321,765
    )
    
    
    6,882,813
    
    
    
    (22,162
    )Ba
    
    
    1,168,506
    
    
    
    (128,516
    )
    
    
    570,090
    
    
    
    (17,235
    )B
    
    
    253,422
    
    
    
    (30,355
    )
    
    
    71,080
    
    
    
    (2,390
    )Caa
    
    
    112,812
    
    
    
    (47,423
    )
    
    
    27,500
    
    
    
    (2,791
    )Ca
    
    
    105,000
    
    
    
    (48,506
    )
    
    
    
    
    
    
    C
    
    
    35,000
    
    
    
    (3,189
    )
    
    
    
    
    
    
    D
    
    
    6,000
    
    
    
    (782
    )
    
    
    
    
    
    
    Total
    
    $
    17,477,946
    
    
    $
    (846,224
    )
    
    $
    18,260,653
    
    
    $
    (176,938
    )Credit Swaps Sold-Tranche:Aaa
    
    $
    2,700,000
    
    
    $
    (495,997
    )
    
    $
    3,450,000
    
    
    $
    (172,175
    )Aa
    
    
    1,350,000
    
    
    
    (386,705
    )
    
    
    950,000
    
    
    
    (94,312
    )A
    
    
    200,000
    
    
    
    (73,091
    )
    
    
    300,000
    
    
    
    (53,569
    )Baa
    
    
    600,000
    
    
    
    (231,999
    )
    
    
    
    
    
    
    B
    
    
    150,000
    
    
    
    (88,725
    )
    
    
    
    
    
    
    Total
    
    $
    5,000,000
    
    
    $
    (1,276,517
    )
    
    $
    4,700,000
    
    
    $
    (320,056
    )CDS on ABS (1):A
    
    $
    5,000
    
    
    $
    (2,530
    )
    
    $
    25,000
    
    
    $
    (12,821
    )Baa
    
    
    15,000
    
    
    
    (11,089
    )
    
    
    35,000
    
    
    
    (20,470
    )Ba
    
    
    5,000
    
    
    
    (3,607
    )
    
    
    15,000
    
    
    
    (11,353
    )B
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    (4,038
    )C
    
    
    42,654
    
    
    
    (36,193
    )
    
    
    
    
    
    
    Total
    
    $
    67,654
    
    
    $
    (53,419
    )
    
    $
    80,000
    
    
    $
    (48,682
    )Credit Swaps Purchased-Single Name:Aa
    
    $
    
    
    
    $
    
    
    
    $
    (8,160
    )
    
    $
    403A
    
    
    (4,120
    )
    
    
    536
    
    
    
    (12,380
    )
    
    
    335Baa
    
    
    (3,580
    )
    
    
    474
    
    
    
    (4,870
    )
    
    
    813Ba
    
    
    (4,040
    )
    
    
    1,689
    
    
    
    
    
    
    
    Total
    
    $
    (11,740
    )
    
    $
    2,699
    
    
    $
    (25,410
    )
    
    $
    1,551
 (1)
    
    - See note 6 Credit Events  CDS on ABS of notes to consolidated financial
statements for further discussion.  82




---



##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 December 31, 2008
    
    
    December 31, 2007Notional
    
    
    Fair
    
    
    Notional
    
    
    FairMoodys Rating Category
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueBy Counterparty Buyer / (Seller)Credit Swaps Sold-Single Name:Aaa
    
    $
    2,411,228
    
    
    $
    (94,793
    )
    
    $
    3,625,845
    
    
    $
    (34,091
    )Aa
    
    
    11,930,958
    
    
    
    (573,250
    )
    
    
    12,153,764
    
    
    
    (118,109
    )A
    
    
    1,746,917
    
    
    
    (100,189
    )
    
    
    2,481,044
    
    
    
    (24,738
    )Non rated (2)
    
    
    1,388,843
    
    
    
    (77,992
    )
    
    
    
    
    
    
    Total
    
    $
    17,477,946
    
    
    $
    (846,224
    )
    
    $
    18,260,653
    
    
    $
    (176,938
    )Credit Swaps Sold-Tranche:Aaa
    
    $
    
    
    
    $
    
    
    
    $
    400,000
    
    
    $
    (33,706
    )Aa
    
    
    4,550,000
    
    
    
    (1,132,176
    )
    
    
    3,850,000
    
    
    
    (246,490
    )A
    
    
    450,000
    
    
    
    (144,341
    )
    
    
    450,000
    
    
    
    (39,860
    )Total
    
    $
    5,000,000
    
    
    $
    (1,276,517
    )
    
    $
    4,700,000
    
    
    $
    (320,056
    )CDS on ABS (1):Aaa
    
    $
    
    
    
    $
    
    
    
    $
    15,000
    
    
    $
    (10,241
    )Aa
    
    
    43,494
    
    
    
    (32,519
    )
    
    
    40,000
    
    
    
    (21,969
    )A
    
    
    19,160
    
    
    
    (17,093
    )
    
    
    25,000
    
    
    
    (16,472
    )Non rated (2)
    
    
    5,000
    
    
    
    (3,807
    )
    
    
    
    
    
    
    Total
    
    $
    67,654
    
    
    $
    (53,419
    )
    
    $
    80,000
    
    
    $
    (48,682
    )Credit Swaps Purchased-Single Name:Aaa
    
    $
    
    
    
    $
    
    
    
    $
    (5,000
    )
    
    $
    383Aa
    
    
    (11,740
    )
    
    
    2,699
    
    
    
    (20,410
    )
    
    
    1,168Total
    
    $
    (11,740
    )
    
    $
    2,699
    
    
    $
    (25,410
    )
    
    $
    1,551
 (1)
    
    - See note 6 Credit Events  CDS on ABS of notes to consolidated financial statements for
further discussion.(2)
    
    - See note 6 Credit Events  Counterparty Default  Lehman Brothers Special Financing Inc. for
further discussion.  83




---



##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 December 31, 2008
    
    
    December 31, 2007Notional
    
    
    Fair
    
    
    Notional
    
    
    FairS&P Rating Category
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueBy Single Name Reference
Entity/TrancheCredit Swaps Sold-Single Name:AAA
    
    $
    555,812
    
    
    $
    (19,594
    )
    
    $
    1,071,504
    
    
    $
    (32,181
    )AA
    
    
    2,276,042
    
    
    
    (78,128
    )
    
    
    3,704,784
    
    
    
    (56,437
    )A
    
    
    6,984,696
    
    
    
    (200,543
    )
    
    
    6,550,733
    
    
    
    (42,398
    )BBB
    
    
    6,427,687
    
    
    
    (336,933
    )
    
    
    6,326,638
    
    
    
    (20,200
    )BB
    
    
    722,933
    
    
    
    (71,601
    )
    
    
    478,820
    
    
    
    (14,583
    )B
    
    
    289,246
    
    
    
    (71,219
    )
    
    
    128,174
    
    
    
    (11,139
    )CCC
    
    
    180,530
    
    
    
    (64,235
    )
    
    
    
    
    
    
    C
    
    
    35,000
    
    
    
    (3,189
    )
    
    
    
    
    
    
    D
    
    
    6,000
    
    
    
    (782
    )
    
    
    
    
    
    
    Total
    
    $
    17,477,946
    
    
    $
    (846,224
    )
    
    $
    18,260,653
    
    
    $
    (176,938
    )Credit Swaps Sold-Tranche:AAA
    
    $
    3,600,000
    
    
    $
    (738,361
    )
    
    $
    3,800,000
    
    
    $
    (212,582
    )AA
    
    
    450,000
    
    
    
    (144,341
    )
    
    
    700,000
    
    
    
    (67,998
    )A
    
    
    100,000
    
    
    
    (37,107
    )
    
    
    100,000
    
    
    
    (21,880
    )BBB
    
    
    500,000
    
    
    
    (187,384
    )
    
    
    100,000
    
    
    
    (17,596
    )BB
    
    
    200,000
    
    
    
    (80,599
    )
    
    
    
    
    
    
    B
    
    
    100,000
    
    
    
    (60,460
    )
    
    
    
    
    
    
    CCC
    
    
    50,000
    
    
    
    (28,265
    )
    
    
    
    
    
    
    Total
    
    $
    5,000,000
    
    
    $
    (1,276,517
    )
    
    $
    4,700,000
    
    
    $
    (320,056
    )CDS on ABS (1):A
    
    $
    
    
    
    $
    
    
    
    $
    50,000
    
    
    $
    (29,921
    )BBB
    
    
    15,000
    
    
    
    (10,828
    )
    
    
    15,000
    
    
    
    (7,242
    )BB
    
    
    10,000
    
    
    
    (6,727
    )
    
    
    15,000
    
    
    
    (11,519
    )B
    
    
    10,000
    
    
    
    (6,597
    )
    
    
    
    
    
    
    CCC
    
    
    10,000
    
    
    
    (7,747
    )
    
    
    
    
    
    
    CC
    
    
    22,654
    
    
    
    (21,520
    )
    
    
    
    
    
    
    Total
    
    $
    67,654
    
    
    $
    (53,419
    )
    
    $
    80,000
    
    
    $
    (48,682
    )Credit Swaps Purchased-Single Name:AA
    
    $
    
    
    
    $
    
    
    
    $
    (8,160
    )
    
    $
    403A
    
    
    (4,120
    )
    
    
    536
    
    
    
    (12,250
    )
    
    
    765BBB
    
    
    (7,620
    )
    
    
    2,163
    
    
    
    (5,000
    )
    
    
    383Total
    
    $
    (11,740
    )
    
    $
    2,699
    
    
    $
    (25,410
    )
    
    $
    1,551
 (1)
    
    - See note 6 Credit Events  CDS on ABS of notes to consolidated
financial statements for further discussion.  84




---



##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 December 31, 2008
    
    
    December 31, 2007Notional
    
    
    Fair
    
    
    Notional
    
    
    FairS&P Rating Category
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueBy Counterparty Buyer / (Seller)Credit Swaps Sold-Single Name:AAA
    
    $
    
    
    
    $
    
    
    
    $
    5,000
    
    
    $
    3AA
    
    
    7,620,037
    
    
    
    (350,248
    )
    
    
    14,367,841
    
    
    
    (131,277
    )A
    
    
    8,469,066
    
    
    
    (417,984
    )
    
    
    3,887,812
    
    
    
    (45,664
    )Non rated (2)
    
    
    1,388,843
    
    
    
    (77,992
    )
    
    
    
    
    
    
    Total
    
    $
    17,477,946
    
    
    $
    (846,224
    )
    
    $
    18,260,653
    
    
    $
    (176,938
    )Credit Swaps Sold-Tranche:AA
    
    $
    2,850,000
    
    
    $
    (640,545
    )
    
    $
    4,250,000
    
    
    $
    (280,196
    )A
    
    
    2,150,000
    
    
    
    (635,972
    )
    
    
    450,000
    
    
    
    (39,860
    )Total
    
    $
    5,000,000
    
    
    $
    (1,276,517
    )
    
    $
    4,700,000
    
    
    $
    (320,056
    )CDS on ABS (1):AA
    
    $
    
    
    
    $
    
    
    
    $
    55,000
    
    
    $
    (32,210
    )A
    
    
    62,654
    
    
    
    (49,612
    )
    
    
    25,000
    
    
    
    (16,472
    )Non rated (2)
    
    
    5,000
    
    
    
    (3,807
    )
    
    
    
    
    
    
    Total
    
    $
    67,654
    
    
    $
    (53,419
    )
    
    $
    80,000
    
    
    $
    (48,682
    )Credit Swaps Purchased-Single Name:AA
    
    $
    
    
    
    $
    
    
    
    $
    (25,410
    )
    
    $
    1,551A
    
    
    (11,740
    )
    
    
    2,699
    
    
    
    
    
    
    
    Total
    
    $
    (11,740
    )
    
    $
    2,699
    
    
    $
    (25,410
    )
    
    $
    1,551
 (1)
    
    - See note 6 Credit Events  CDS on ABS of notes to consolidated financial statements for
further discussion.(2)
    
    - See note 6 Credit Events  Counterparty Default  Lehman Brothers Special Financing Inc.
for further discussion.   85




---



##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  December 31, 2008
    
    
    December 31, 2007Notional
    
    
    Fair
    
    
    Notional
    
    
    FairCountry of Domicile
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueCredit Swaps Sold-Single NameBy Reference Entity:North America
    
    $
    9,135,739
    
    
    $
    (481,009
    )
    
    $
    9,531,846
    
    
    $
    (149,169
    )Europe
    
    
    7,456,207
    
    
    
    (314,651
    )
    
    
    7,837,807
    
    
    
    (21,719
    )Asia-Pacific
    
    
    707,000
    
    
    
    (38,839
    )
    
    
    712,000
    
    
    
    (4,791
    )Others
    
    
    179,000
    
    
    
    (11,725
    )
    
    
    179,000
    
    
    
    (1,259
    )Total
    
    $
    17,477,946
    
    
    $
    (846,224
    )
    
    $
    18,260,653
    
    
    $
    (176,938
    )By Counterparty:North America
    
    $
    8,872,732
    
    
    $
    (439,704
    )
    
    $
    9,431,827
    
    
    $
    (100,747
    )Europe
    
    
    8,463,214
    
    
    
    (401,245
    )
    
    
    8,686,826
    
    
    
    (75,709
    )Asia-Pacific
    
    
    132,000
    
    
    
    (5,203
    )
    
    
    132,000
    
    
    
    (534
    )Others
    
    
    10,000
    
    
    
    (72
    )
    
    
    10,000
    
    
    
    52Total
    
    $
    17,477,946
    
    
    $
    (846,224
    )
    
    $
    18,260,653
    
    
    $
    (176,938
    )Credit Swaps Sold -TrancheBy Counterparty:North America
    
    $
    600,000
    
    
    $
    (143,205
    )
    
    $
    
    
    
    $
    Europe
    
    
    4,400,000
    
    
    
    (1,133,312
    )
    
    
    4,700,000
    
    
    
    (320,056
    )Total
    
    $
    5,000,000
    
    
    $
    (1,276,517
    )
    
    $
    4,700,000
    
    
    $
    (320,056
    )CDS on ABS(1)By Reference Entity:North America
    
    $
    67,654
    
    
    $
    (53,419
    )
    
    $
    80,000
    
    
    $
    (48,682
    )Total
    
    $
    67,654
    
    
    $
    (53,419
    )
    
    $
    80,000
    
    
    $
    (48,682
    )By Counterparty:North America
    
    $
    38,494
    
    
    $
    (27,695
    )
    
    $
    45,000
    
    
    $
    (24,418
    )Europe
    
    
    29,160
    
    
    
    (25,724
    )
    
    
    35,000
    
    
    
    (24,264
    )Total
    
    $
    67,654
    
    
    $
    (53,419
    )
    
    $
    80,000
    
    
    $
    (48,682
    )Credit Swaps Purchased-Single NameBy Reference Entity:North America
    
    $
    (11,740
    )
    
    $
    2,699
    
    
    $
    (25,410
    )
    
    $
    1,551Total
    
    $
    (11,740
    )
    
    $
    2,699
    
    
    $
    (25,410
    )
    
    $
    1,551By Counterparty:Europe
    
    $
    (11,740
    )
    
    $
    2,699
    
    $
    $
    (25,410
    )
    
    $
    1,551Total
    
    $
    (11,740
    )
    
    $
    2,699
    
    
    $
    (25,410
    )
    
    $
    1,551
 (1)
    
    - See note 6 Credit Events  CDS on ABS of notes to consolidated financial
statements for further discussion.  86




---



##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  December 31, 2008
    
    
    December 31, 2007Notional
    
    
    Fair
    
    
    Notional
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueCredit Swaps Sold-Single NameYear of Maturity2008
    
    $
    
    
    
    $
    
    
    
    $
    1,180,401
    
    
    $
    (302
    )2009
    
    
    2,628,795
    
    
    
    (43,412
    )
    
    
    2,723,618
    
    
    
    (6,449
    )2010
    
    
    5,815,475
    
    
    
    (231,783
    )
    
    
    6,052,998
    
    
    
    (56,037
    )2011
    
    
    2770,195
    
    
    
    (187,662
    )
    
    
    2,953,911
    
    
    
    (53,905
    )2012
    
    
    5,106,916
    
    
    
    (325,565
    )
    
    
    5,309,725
    
    
    
    (60,119
    )2013
    
    
    1,156,565
    
    
    
    (57,802
    )
    
    
    40,000
    
    
    
    (126
    )Total
    
    $
    17,477,946
    
    
    $
    (846,224
    )
    
    $
    18,260,653
    
    
    $
    (176,938
    )Credit Swaps Sold-TrancheYear of Maturity2012
    
    $
    1,000,000
    
    
    $
    (70,593
    )
    
    $
    1,000,000
    
    
    $
    (6,204
    )2013
    
    
    350,000
    
    
    
    (167,083
    )
    
    
    350,000
    
    
    
    (58,715
    )2014
    
    
    3,650,000
    
    
    
    (1,038,841
    )
    
    
    3,350,000
    
    
    
    (255,137
    )Total
    
    $
    5,000,000
    
    
    $
    (1,276,517
    )
    
    $
    4,700,000
    
    
    $
    (320,056
    )CDS on ABS(1)Year of Maturity2010
    
    $
    10,000
    
    
    $
    (6,597
    )
    
    $
    10,000
    
    
    $
    (4,632
    )2011
    
    
    5,000
    
    
    
    (4,491
    )
    
    
    10,000
    
    
    
    (6,368
    )2012
    
    
    14,160
    
    
    
    (10,742
    )
    
    
    15,000
    
    
    
    (9,322
    )2013
    
    
    15,000
    
    
    
    (12,002
    )
    
    
    15,000
    
    
    
    (9,443
    )2014
    
    
    15,000
    
    
    
    (11,554
    )
    
    
    20,000
    
    
    
    (12,438
    )2016
    
    
    8,494
    
    
    
    (8,033
    )
    
    
    10,000
    
    
    
    (6,479
    )Total
    
    $
    67,654
    
    
    $
    (53,419
    )
    
    $
    80,000
    
    
    $
    (48,682
    )Credit Swaps
Purchased-Single NameYear of Maturity2012
    
    $
    
    
    
    $
    
    
    
    $
    (5,000
    )
    
    $
    3832014
    
    
    (11,740
    )
    
    
    2,699
    
    
    
    (20,410
    )
    
    
    1,168Total
    
    $
    (11,740
    )
    
    $
    2,699
    
    
    $
    (25,410
    )
    
    $
    1,551
   87




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 6. 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
 CDS on ABS
     88




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
   Counterparty Default  Lehman Brothers Special Financing Inc.
   89




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 7. Financial Instruments and Fair Value Disclosures
    
    
    Level 1  Valuations based on unadjusted quoted prices in active markets for identical
assets or liabilities.
  
    
    Level 2  Valuations based on quoted prices in markets that are not considered to be
active; or valuations for which all significant inputs are observable or can be
corroborated by observable market data, either directly or indirectly.
  
    
    Level 3  Valuations based on significant unobservable inputs that are supported by
little or no market activity.
   90




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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 credit risk of Primus Financials counterparties, as well as its
own nonperformance risk. SFAS No. 157 requires that nonperformance risk be considered when
determining the fair value of Primus Financials 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 inputs to the valuation model
include: current credit swap premium quotes obtained from an independent pricing service
on the Reference Entities, estimated recovery rates on each Reference Entities, current
interest rates and foreign exchange rates. 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 average credit
swap premium quotes on specific Reference Entities. The Company adjusts the independent
mid-market credit swap premium quotes to derive exit price valuations.
 
    
    For tranche credit swaps, Primus Financial calculates a mid-market valuation 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 interest rates market and correlation
levels derived from credit swap indices. . Primus Financial adjusts the mid-market
valuations obtained from the model to estimated exit price valuations, using mid-market to
exit price quotes obtained from tranche counterparties.
 
    
    For CDS on ABS, Primus Financial obtains expected cash flows on the underlying
securities from an independent valuation service and quotes from Primus Financials
counterparties. Primus Financial uses the cash flow data as input to an ABS valuation
model to obtain mid-market valuations. Primus Financial adjusts the mid-market valuations
to obtain exit price valuations.
  91




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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 and money market
accounts, 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 two 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. The valuations are benchmarked to third-party quotes.
 Fair Value Measurements
   Nonperformance Risk Adjustment
   92




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  Quoted Pricesin
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significant
    
    
    Assets /for
    
    
    Observable
    
    
    Unobservable
    
    
    LiabilitiesIdentical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    at Fair(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    ValueAssetsCash and cash equivalents
    
    $
    243,909
    
    
    $
    37,003
    
    
    $
    
    
    
    $
    280,912Available-for-sale investments
    
    
    
    
    
    
    482,134
    
    
    
    796
    
    
    
    482,930Trading account assets
    
    
    
    
    
    
    
    
    
    
    3,940
    
    
    
    3,940Other assets
    
    
    
    
    
    
    7,813
    
    
    
    
    
    
    
    7,813Total Assets
    
    $
    243,909
    
    
    $
    526,950
    
    
    $
    4,736
    
    
    $
    775,595LiabilitiesUnrealized loss on credit swaps
    
    $
    
    
    
    $
    
    
    
    $
    2,173,461
    
    
    $
    2,173,461Total Liabilities
    
    $
    
    
    
    $
    
    
    
    $
    2,173,461
    
    
    $
    2,173,461
  Year EndedDecember 31, 2008Available-for-Sale
    
    
    Unrealized Loss onInvestments
    
    
    Credit SwapsBalance, beginning of period
    
    $
    9,657
    
    
    $
    (368,739
    )Realized (losses)
    
    
    (11,884
    )
    
    
    (12,215
    )Unrealized gains (losses)
    
    
    2,411
    
    
    
    (948,981
    )Purchases, sales, issuances and settlements
    
    
    4,552
    
    
    
    Transfers in and/or out of Level 3, net
    
    
    
    
    
    
    (843,526
    )Balance, end of period
    
    $
    4,736
    
    
    $
    (2,173,461
    )
    93




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 Fair Value Option
  8. CLO Transactions
  Accounting for CLO Transactions
 Consolidation of Variable Interest Entities
 Amendments to the Impairment Guidance of EITF Issue No. 99-20
   94




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  Primus CLO I, Ltd.
  Primus CLO II, Ltd.
  9. Fixed Assets and Internal Use Software Costs
  December 31,2008
    
    
    2007Asset categoryFurniture and fixtures
    
    $
    1,173
    
    
    $
    1,317Computers
    
    
    998
    
    
    
    1,059Office and telephone equipment
    
    
    167
    
    
    
    393Leasehold improvements
    
    
    2,043
    
    
    
    2,717Internal use software costs
    
    
    15,068
    
    
    
    15,02419,449
    
    
    
    20,510Less accumulated depreciation and amortization
    
    
    16,141
    
    
    
    15,474Total fixed assets and internal use software costs
    
    $
    3,308
    
    
    $
    5,036
   95




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 10. Long-Term Debt
 7% Senior Notes
   $125 million Subordinated Deferrable Interest Notes
  $75 million Subordinated Deferrable Interest Notes
   96




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
   11. Income taxes
        97




---



##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
        98




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  December 31,2008
    
    
    2007
    
    
    2006Current:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State/City
    
    
    50
    
    
    
    52
    
    
    
    42Foreign
    
    
    11
    
    
    
    
    
    
    
    Total current
    
    
    61
    
    
    
    52
    
    
    
    42Deferred:Federal
    
    
    
    
    
    
    
    
    
    
    State/City
    
    
    
    
    
    
    
    
    
    
    Foreign
    
    
    
    
    
    
    
    
    
    
    Total deferred
    
    
    
    
    
    
    
    
    
    
    Total provision for income taxes
    
    $
    61
    
    
    $
    52
    
    
    $
    42
   2008
    
    
    2007
    
    
    2006U.S. federal income tax provision on Primus Asset
Managements taxable income
    
    $
    
    
    
    $
    
    
    
    $
    U.S. state and local tax provision
    
    
    50
    
    
    
    52
    
    
    
    42Foreign tax provision
    
    
    11
    
    
    
    
    
    
    
    Total income tax provision
    
    $
    61
    
    
    $
    52
    
    
    $
    42
     99




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  December 31,2008
    
    
    2007
    
    
    2006Deferred tax assetsCapitalized and pre-operating formation costs
    
    $
    
    
    
    $
    
    
    
    $
    631Share compensation
    
    
    4,115
    
    
    
    3,057
    
    
    
    3,478Net operating losses
    
    
    5,543
    
    
    
    5,330
    
    
    
    5,317Depreciation
    
    
    156
    
    
    
    
    
    
    
    Other
    
    
    16
    
    
    
    382
    
    
    
    475Gross deferred tax asset
    
    
    9,830
    
    
    
    8,769
    
    
    
    9,901Deferred tax liabilityOther
    
    
    
    
    
    
    
    
    
    
    Depreciation
    
    
    
    
    
    
    (348
    )
    
    
    (447
    )Gross deferred tax liability
    
    
    
    
    
    
    (348
    )
    
    
    (447
    )Net deferred tax asset
    
    
    9,830
    
    
    
    8,421
    
    
    
    9,454Valuation allowance
    
    
    (9,830
    )
    
    
    (8,421
    )
    
    
    (9,454
    )Net deferred tax asset after valuation allowance
    
    $
    
    
    
    $
    
    
    
    $
    
  December 31,2008
    
    
    2007
    
    
    2006Balance at beginning of period
    
    $
    8,421
    
    
    $
    9,454
    
    
    $
    4,763Capitalized and pre-operating costs
    
    
    
    
    
    
    (631
    )
    
    
    (69
    )Share compensation
    
    
    1,058
    
    
    
    (421
    )
    
    
    1,995Tax depreciation / other
    
    
    138
    
    
    
    6
    
    
    
    793Net operating loss
    
    
    213
    
    
    
    13
    
    
    
    1,972Balance at end of period
    
    $
    9,830
    
    
    $
    8,421
    
    
    $
    9,454
 12. Preferred securities of Subsidiary
 Reporting on the Costs of
Start-Up Activities
   100




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
     13. Shareholders Equity
  14. Earnings per share
  Years Ended December 31,(in thousands, except per share data)
    
    2008
    
    
    2007
    
    
    2006Net earnings (loss) available to
common shareholders
    
    $
    (1,716,146
    )
    
    $
    (563,541
    )
    
    $
    94,891Weighted-average basic shares
outstanding
    
    
    44,722
    
    
    
    44,808
    
    
    
    43,306Effect of dilutive instruments:Employee options
    
    
    
    
    
    
    
    
    
    
    53Restricted share units
    
    
    
    
    
    
    
    
    
    
    322Warrants
    
    
    
    
    
    
    
    
    
    
    791Dilutive potential shares
    
    
    
    
    
    
    
    
    
    
    1,166Weighted average diluted shares
outstanding
    
    
    44,722
    
    
    
    44,808
    
    
    
    44,472Basic EPS
    
    $
    (38.37
    )
    
    $
    (12.58
    )
    
    $
    2.19Diluted EPS
    
    $
    (38.37
    )
    
    $
    (12.58
    )
    
    $
    2.13
  101




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  15. Commitments and Contingencies
 Leases
   2009
    
    $
    1,2052010
    
    
    1,2052011
    
    
    1,2042012
    
    
    1,2222013
    
    
    1,1542014 and thereafter
    
    
    2,503Total
    
    $
    8,493
   Statutory Requirements
   102




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 16. Restructuring  Harrier Discontinuance
   17. Employee Share-Based Compensation Plans
  Incentive Compensation Plans
   Share Options
    103




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  Years Ended December 31,2008
    
    
    2007
    
    
    2006Risk free interest rate
    
    
    N/A
    
    
    
    5.32
    %
    
    
    5.16
    %Volatility
    
    
    N/A
    
    
    
    32.8
    %
    
    
    33.8
    %Expected dividend yield
    
    
    N/A
    
    
    
    0.00
    %
    
    
    0.00
    %Expected option life
    
    
    N/A
    
    
    7 years
    
    
    7 yearsWeighted average fair value of
options
    
    
    N/A
    
    
    $
    3.73
    
    
    $
    4.02
  2008
    
    
    2007
    
    
    2006Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber
    
    
    Average
    
    
    Number
    
    
    Average
    
    
    Number
    
    
    Averageof
    
    
    Exercise
    
    
    of
    
    
    Exercise
    
    
    of
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at beginning
of year
    
    
    1,311,624
    
    
    $
    11.61
    
    
    
    858,158
    
    
    $
    11.18
    
    
    
    710,860
    
    
    $
    10.43Granted
    
    
    
    
    
    
    
    
    
    
    847,607
    
    
    $
    11.70
    
    
    
    422,122
    
    
    $
    12.46Exercised
    
    
    
    
    
    
    
    
    
    
    (67,968
    )
    
    $
    8.20
    
    
    
    (56,641
    )
    
    $
    8.73Forfeited
    
    
    86,075
    
    
    $
    11.88
    
    
    
    (326,173
    )
    
    $
    11.41
    
    
    
    (218,183
    )
    
    $
    11.84Outstanding at end of year
    
    
    1,225,549
    
    
    $
    11.59
    
    
    
    1,311,624
    
    
    $
    11.61
    
    
    
    858,158
    
    
    $
    11.18Exercisable at end of year
    
    
    621,451
    
    
    $
    11.32
    
    
    
    332,438
    
    
    $
    10.85
    
    
    
    275,623
    
    
    $
    9.92
  Options Outstanding
    
    
    Options ExercisableAverage
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedNumber
    
    
    Remaining
    
    
    Average
    
    
    Aggregate
    
    
    Number
    
    
    Average
    
    
    AggregateRange of Exercise
    
    of
    
    
    Contractual
    
    
    Exercise
    
    
    Intrinsic
    
    
    of
    
    
    Exercise
    
    
    IntrinsicPrices
    
    Shares
    
    
    Life (Years)
    
    
    Price
    
    
    Value
    
    
    Shares
    
    
    Price
    
    
    Value$6.94
    
    
    65,625
    
    
    
    4.1
    
    
    $
    6.94
    
    
    
    
    
    
    
    65,625
    
    
    $
    6.94
    
    
    
    $6.95  $9.76
    
    
    113,125
    
    
    
    5.1
    
    
    $
    9.76
    
    
    
    
    
    
    
    113,125
    
    
    $
    9.76
    
    
    
    $9.77  $13.50
    
    
    1,046,799
    
    
    
    4.5
    
    
    $
    12.08
    
    
    
    
    
    
    
    442,701
    
    
    $
    12.36
    
    
    
    Total
    
    
    1,225,549
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    621,451
    
    
    
    
    
    
    
    
  104




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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, 2007
    
    
    552,608
    
    
    $
    12.25Granted
    
    
    1,511,596
    
    
    $
    3.85Vested
    
    
    (272,056
    )
    
    $
    10.99Forfeited
    
    
    (180,796
    )
    
    $
    8.33Unvested at December 31, 2008
    
    
    1,611,352
    
    
    $
    5.03
  18. Dividend Restrictions
   105




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
  19. Interest Rate Swap Agreement
  20. Quarterly Operating Results (unaudited)
 First
    
    
    Second
    
    
    Third
    
    
    Fourth(in thousands)
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter2008:Total 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)
    
    
    (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
    )
 First
    
    
    Second
    
    
    Third
    
    
    Fourth(in thousands)
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter2007:Total net revenues (losses)
    
    $
    7,071
    
    
    $
    (4,409
    )
    
    $
    (112,031
    )
    
    $
    (383,163
    )Operating loss
    
    
    (9,662
    )
    
    
    (21,520
    )
    
    
    (128,435
    )
    
    
    (403,872
    )Net loss
    
    
    (9,718
    )
    
    
    (21,516
    )
    
    
    (128,435
    )
    
    
    (403,872
    )Basic earnings (loss) per share
    
    $
    (0.22
    )
    
    $
    (0.48
    )
    
    $
    (2.85
    )
    
    $
    (8.97
    )Diluted earnings (loss) per share
    
    $
    (0.22
    )
    
    $
    (0.48
    )
    
    $
    (2.85
    )
    
    $
    (8.97
    )
  106




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 21. Primus Guaranty, Ltd.   Standalone Financial Statements
 Primus Guaranty, Ltd.
Statements of Financial Condition
 December 31,(in thousands)
    
    2008
    
    
    2007AssetsCash and cash equivalents
    
    $
    42,909
    
    
    $
    70,455Available-for-sale investments
    
    
    21,248
    
    
    
    Accrued interest receivable
    
    
    396
    
    
    
    Prepaid expenses
    
    
    1,518
    
    
    
    437Intercompany receivable
    
    
    558
    
    
    
    2,942Intercompany loans
    
    
    11,742
    
    
    
    13,931Debt issuance costs, net
    
    
    3,587
    
    
    
    4,235Other assets
    
    
    7,813
    
    
    
    904Total assets
    
    
    89,771
    
    
    $
    92,904Liabilities and shareholders equityAccounts payable
    
    $
    391
    
    
    $
    314Interest payable
    
    
    54
    
    
    
    109Long-term debt
    
    
    117,535
    
    
    
    125,904Intercompany payable
    
    
    5
    
    
    
    2,175Losses of subsidiaries in excess of investments
    
    
    1,774,742
    
    
    
    57,864Total liabilities
    
    
    1,892,727
    
    
    
    186,366Common shares
    
    
    3,263
    
    
    
    3,603Additional paid-in-capital
    
    
    281,596
    
    
    
    280,224Accumulated other comprehensive income (loss)
    
    
    908
    
    
    
    (4,712
    )Retained earnings (deficit)
    
    
    (2,088,723
    )
    
    
    (372,577
    )Total shareholders equity (deficit)
    
    
    (1,802,956
    )
    
    
    (93,462
    )Total liabilities and shareholders equity
    
    
    89,771
    
    
    $
    92,904
  107




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 Primus Guaranty, Ltd.
Statements of Operations
 Years Ended December 31,(in thousands)
    
    2008
    
    
    2007
    
    
    2006RevenuesInterest income
    
    $
    2,285
    
    
    $
    5,157
    
    
    $
    252Intercompany interest income
    
    
    1,014
    
    
    
    
    
    
    
    Gain on retirement of long-term debt
    
    
    9,716
    
    
    
    
    
    
    
    Total revenues
    
    
    13,015
    
    
    
    5,157
    
    
    
    252ExpensesIntercompany expenses *
    
    
    4,761
    
    
    
    7,687
    
    
    
    5,911Share compensation
    
    
    371
    
    
    
    367
    
    
    
    270Interest expense
    
    
    6,874
    
    
    
    8,458
    
    
    
    99Professional and legal fees
    
    
    1,288
    
    
    
    809
    
    
    
    92Other
    
    
    705
    
    
    
    374
    
    
    
    2Total expenses
    
    
    13,999
    
    
    
    17,695
    
    
    
    6,374Loss before equity in earnings (loss) of subsidiaries
    
    
    (984
    )
    
    
    (12,538
    )
    
    
    (6,122
    )Equity in earnings (loss) of subsidiaries, net of tax
    
    
    (1,715,162
    )
    
    
    (551,003
    )
    
    
    101,013Net income (loss)
    
    $
    (1,716,146
    )
    
    $
    (563,541
    )
    
    $
    94,891
 *
    
    Charges for services provided by subsidiaries under modified intercompany service agreement.
  108




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##### Table of Contents



Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
 Primus Guaranty, Ltd.
Statements of Cash Flows
 Years Ended December 31,(in thousands)
    
    2008
    
    
    2007
    
    
    2006Cash flows from operating activities:Net income (loss)
    
    $
    (1,716,146
    )
    
    $
    (563,541
    )
    
    $
    94,891Adjustments to reconcile net income (loss) to net cash used
in operating activities:Share compensation
    
    
    4,611
    
    
    
    3,748
    
    
    
    3,654Amortization of debt issuance costs
    
    
    143
    
    
    
    146
    
    
    
    2Net amortization of premium and discount on securities
    
    
    (218
    )
    
    
    
    
    
    
    Change in accumulated comprehensive (income) loss of
subsidiaries
    
    
    4,792
    
    
    
    (2,337
    )
    
    
    1,879Gain on retirement of long-term debt
    
    
    (9,716
    )
    
    
    
    
    
    
    Equity in subsidiaries (earnings) loss, net of tax
    
    
    1,715,162
    
    
    
    551,003
    
    
    
    (101,013
    )Increase (decrease) in cash resulting from changes in:Intercompany receivables/payables and loans
    
    
    2,403
    
    
    
    (16,032
    )
    
    
    (6,001
    )Accrued interest receivable
    
    
    (396
    )
    
    
    
    
    
    
    Prepaid expenses and other assets
    
    
    (1,081
    )
    
    
    (234
    )
    
    
    (159
    )Accounts payable
    
    
    77
    
    
    
    4
    
    
    
    432Interest payable
    
    
    (55
    )
    
    
    12
    
    
    
    97Net cash used in operating activities
    
    
    (424
    )
    
    
    (27,231
    )
    
    
    (6,218
    )Cash flows from investing activities:Purchases of available-for-sale investments
    
    
    (28,861
    )
    
    
    
    
    
    
    Maturities and sales of available-for-sale investments
    
    
    6,567
    
    
    
    
    
    
    
    Net return from (investment in) subsidiaries
    
    
    3,808
    
    
    
    (21,810
    )
    
    
    (54,887
    )Net cash used in investing activities
    
    
    (18,486
    )
    
    
    (21,810
    )
    
    
    (54,887
    )Cash flows from financing activities:Payments for retirement of long-term debt
    
    
    (5,057
    )
    
    
    
    
    
    
    Purchase and retirement of common shares
    
    
    (3,579
    )
    
    
    (1,170
    )
    
    
    (793
    )Proceeds from exercise of warrants
    
    
    
    
    
    
    7,335
    
    
    
    Proceeds from exercise of options
    
    
    
    
    
    
    557
    
    
    
    609Proceeds from issuance of debt
    
    
    
    
    
    
    
    
    
    
    125,000Debt issuance costs
    
    
    
    
    
    
    
    
    
    
    (4,505
    )Net cash provided by (used in) financing activities
    
    
    (8,636
    )
    
    
    6,722
    
    
    
    120,311Net increase (decrease) in cash
    
    
    (27,546
    )
    
    
    (42,319
    )
    
    
    59,206Cash and cash equivalents at beginning of year
    
    
    70,455
    
    
    
    112,774
    
    
    
    53,568Cash and cash equivalents at end of year
    
    
    42,909
    
    
    $
    70,455
    
    
    $
    112,774
  109




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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
    110




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##### Table of Contents



Part III.
 
 Item 10. Directors, Executive Officers and Corporate Governance
      
 Item 11. Executive Compensation
   111




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##### Table of Contents



Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters
 Securities Authorized for Issuance under Equity Compensation Plans
  (c)(b)
    
    
    Number of Securities(a)
    
    
    Weighted-Average
    
    
    Remaining Available forNumber of Securities to be
    
    
    Exercise Price of
    
    
    Future Issuance Under EquityIssued upon Exercise of
    
    
    Outstanding
    
    
    Compensation PlansOutstanding Options,
    
    
    Options, Warrants
    
    
    (Excluding SecuritiesPlan Category
    
    Warrants and Rights
    
    
    and Rights
    
    
    Reflected in Column (a)Equity
compensation plans approved by security holdersShare Awards(1) (2)
    
    
    1,661,702Options
    
    
    1,225,549
    
    
    $
    11.59Total
    
    
    2,887,251
    
    
    
    
    
    
    
    7,688,816
 (1)
    
    Includes share units and performance shares, assuming target performance.(2)
    
    Includes 178,814 shares issued to directors in January 2009, as compensation for their board service for 2008.  
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accountant Fees and Services
   112




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##### Table of Contents



Part IV.
 
 Item. 15 Exhibits and Financial Statement Schedules
         113




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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
    
    
    By-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)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, 200810.12
    
    
    Primus Guaranty, Ltd. Incentive Compensation Plan (including amendments through
January 28, 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
  114




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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 13, 2009/s/ Richard Claiden

Richard Claiden
    
    Chief Financial Officer

(Principal Financial and
Accounting Officer)
    
    March 13, 2009/s/ Michael P. Esposito, Jr.

Michael P. Esposito, Jr.
    
    Director and Chairman of the Board
    
    March 13, 2009/s/ Frank P. Filipps

Frank P. Filipps
    
    Director
    
    March 13, 2009/s/ Paul S. Giordano

Paul S. Giordano
    
    Director
    
    March 13, 2009/s/ Thomas J. Hartlage

Thomas J. Hartlage
    
    Director
    
    March 13, 2009/s/ James K. Hunt

James K. Hunt
    
    Director
    
    March 13, 2009/s/ Robert R. Lusardi

Robert R. Lusardi
    
    Director
    
    March 13, 2009/s/ James H. MacNaughton

James H. MacNaughton
    
    Director
    
    March 13, 2009/s/ John A. Ward, III

John A. Ward, III
    
    Director
    
    March 13, 2009
  115




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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
    
    
    By-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)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, 200810.12
    
    
    Primus Guaranty, Ltd. Incentive Compensation Plan (including amendments through
January 28, 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
  116