UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C.20549

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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the fiscal year ended December31, 2004

OR

 TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Forthe transition period from________ to________.

Commission File Number: 001-32307

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Primus Guaranty, Ltd.(Exact name of registrant as specified in itscharter)

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| **Bermuda**                                                   |  | **NotRequired**                     |
| (State or other jurisdiction ofincorporation or organization) |  | (I.R.S. Employer IdentificationNo.) |
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Clarendon House 2 Church StreetHamilton HM 11, Bermuda(Address of principal executive offices,including zip code)

441-296-0519(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the ExchangeAct:

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| Titleof each class            |  | Name on each exchange on whichregistered |
| CommonShares, $0.08 par value |  | New York StockExchange                   |
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Securities registered pursuant toSection 12(g) of the Exchange Act: None

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90days. Yes  No 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best ofregistrant's knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act). Yes  No 

The aggregatemarket value of the registrant's common shares held bynon-affiliates of the registrant was approximately $133,397,227 basedon the closing price quoted by the New York Stock Exchange as of March15, 2005. As of March 15, 2005, the number of shares outstanding of theregistrant's common shares, $0.08 par value, was 42,783,939.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of theregistrant's definitive Proxy Statement relating to theregistrant's 2005 annual meeting of shareholders are incorporatedby reference into Part III of this annualreport.

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Primus Guaranty,Ltd. Form 10-KFor the fiscal year ended December 31,2004

INDEX

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| **PartI.**   |  |                                                                                         |    |   |   |   |
| Item1.       |  | Business                                                                                     |    |   | 4      |   |
| Item2.       |  | Properties                                                                                   |    |   | 28     |   |
| Item3.       |  | Legal Proceedings                                                                            |    |   | 28     |   |
| Item4.       |  | Submission of Matters to a Vote of SecurityHolders                                           |    |   | 28     |   |
|         |  |                                                                                         |    |   |   |   |
| **PartII.**  |  |                                                                                         |    |   |   |   |
| Item 5.      |  | Market forRegistrant's Common Equity and Related StockholderMatters                          |    |   | 29     |   |
| Item 6.      |  | SelectedHistorical Consolidated FinancialData                                                |    |   | 31     |   |
| Item 7.      |  | Management'sDiscussion and Analysis of Financial Condition and Results ofOperations          |    |   | 33     |   |
| Item 7A.     |  | Quantitativeand Qualitative Disclosures about MarketRisk                                     |    |   | 49     |   |
| Item 8.      |  | Financial Statementsand Supplementary Data                                                   |    |   | 50     |   |
| Item9.       |  | Changes in and Disagreements with Accountants on Accountingand Financial Disclosures         |    |   | 82     |   |
| Item9A.      |  | Controls and Procedures                                                                      |    |   | 82     |   |
| Item9B.      |  | OtherInformation                                                                             |    |   | 82     |   |
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| **PartIII.** |  |                                                                                         |    |   |   |   |
| Item10.      |  | Directors and Executive Officers of theRegistrant                                            |    |   | 82     |   |
| Item 11.     |  | ExecutiveCompensation                                                                        |    |   | 82     |   |
| Item 12.     |  | SecurityOwnership of Certain Beneficial Owners and Management and RelatedStockholder Matters |    |   | 83     |   |
| Item13.      |  | Certain Relationships and RelatedTransactions                                                |    |   | 83     |   |
| Item 14.     |  | PrincipalAccounting Fees andServices                                                         |    |   | 83     |   |
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| **PartIV.**  |  |                                                                                         |    |   |   |   |
| Item 15.     |  | Exhibitsand Financial Statement Schedules                                                    |    |   | 84     |   |
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| Signatures   |  |                                                                                         | 86 |   |
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CAUTIONARY NOTE REGARDING FORWARD-LOOKINGSTATEMENTS

This annual report on Form 10-K containsforward-looking statements that involve substantial risks anduncertainties. All statements, other than statements of historicalfacts, included in this document regarding our strategy, futureoperations, future financial position, future revenues, projectedcosts, prospects, plans and objectives of management areforward-looking statements. The words"anticipate,""believe,""estimate,""expect," "intend,""may," "plan,""project," "will,""would" and similar expressions are intendedto identify forward-looking statements, although not allforward-looking statements contain these identifying words. We may notactually achieve the plans, intentions or expectations disclosed in ourforward-looking statements and you should not place undue reliance onour forward-looking statements. Actual results or events could differmaterially from the plans, intentions and expectations disclosed in theforward-looking statements we make. We have included important factorsin the cautionary statements included in this annual report on From10-K, particularly in the "Risk Factors"section, that we believe could cause actual results or events to differmaterially from the forward-looking statements that we make. Ourforward-looking statements do not reflect the potential impact of anyfuture acquisitions, mergers, dispositions, joint ventures orinvestments we may make. We do not assume any obligation to update anyforward-looking statements.

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Part I.

Item 1.    Business

Unless otherwise indicatedor the context requires otherwise, references to"we," "us,""our," "company" or"Primus" refer to the consolidated operationsof Primus Guaranty, Ltd., or Primus Guaranty, and references to acompany name refer solely to such company.

Overview

Primus Guaranty, Ltd. is a Bermuda holding company that wasincorporated in 1998. Primus Financial Products, LLC, or PrimusFinancial, is our principal subsidiary and a AAA/Aaa rated seller ofcredit swaps. In exchange for a fixed quarterly premium we agree, upona default or other credit event (e.g., bankruptcy, moratorium orrepudiation) affecting a designated issuer, which we refer to as aReference Entity, to pay our customer, which we refer to as acounterparty, an agreed amount. We pay this agreed amount, which wecall a notional amount, upon our counterparty's delivery to us ofthe Reference Entity's debt obligation. Credit swaps are anefficient and standardized mechanism to reduce credit risk exposurearising from the ownership of financial obligations such as bonds,loans and receivables. We seek to minimize the risk inherent in ourcredit swap portfolio by maintaining a high quality, highly diversifiedcredit swap portfolio across Reference Entities, industries andcountries. Primus Financial is also permitted to sell credit swapsreferencing portfolios containing obligations of multiple referenceentities, which we call "tranches".

Primus Asset Management, Inc., or Primus Asset Management, anotherof our subsidiaries, manages Primus Financial's credit swapbusiness and the credit swap portfolios of third parties. For suchservices, Primus Asset Management receives a management fee.

Wealso have a Bermuda registered financial guaranty insurance company,Primus Re, Ltd., or Primus Re, that offers credit insurance protectionto companies that prefer insurance products to credit swaps. For thisprotection, Primus Re receives an insurance premium.

Wecompleted our Initial Public Offering, or IPO, on October 5, 2004, inwhich we issued 9,143,493 common shares at a price of $13.50 per share.Our shares are listed on the New York Stock Exchange, or NYSE.

Our registered office is at Clarendon House, 2 Church Street,Hamilton Street, Hamilton HM 11, Bermuda and our telephone number is441-296-0519. The offices of our principal operating subsidiaries,Primus Financial and Primus Asset Management, are located at 360Madison Avenue, 23rd Floor, New York, New York 10017 andtheir telephone number is 212-697-2227.

Credit Swap Market

The credit swap market has developed from a small, niche segment ofthe capital markets to a global market that is rapidly growing withdiversified product applications and a wide range of participants.Total notional amount outstanding of the global credit swap market(excluding asset swaps) has grown from approximately $180.0 billion atDecember 31, 1997 to $5.4 trillion as of December 31, 2004, accordingto the British Bankers Association and the International Swaps andDerivatives Association, Inc., or ISDA.

According to TheFuture of Credit Derivatives (March, 2004) by McKinsey &Company, growth in the number of market participants and market volumeis forecast to continue at its current rapid pace, and is being drivenprimarily by the significant contribution that credit swaps are makingto efficient risk management and rational credit pricing. Credit swapshave also been employed in structured products that allow investors toassume different levels of risk with respect to portfolios ofunderlying Reference Entities.

Participants in the credit swapmarket have grown and diversified to include a wide range of financialinstitutions. Commercial banks are the most active participants in thecredit swap market.

Commercial banks, the first major users ofcredit swap protection, use credit swaps to manage the regulatory andeconomic capital required to support their credit origination andlending operations. 

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Active credit risk management allows financialinstitutions and corporations to continuously evaluate their portfoliosof credit risk against regulatory and economic guidelines and torebalance their portfolios based on the various trade-offs among clientdemands, capital requirements and risk-adjusted returns.

Non-bank participants in the credit swap market have expandedrapidly to include insurance companies, investment funds and industrialcorporations.

The application of credit swaps has evolved overtime, from single Reference Entities to baskets of Reference Entities,or portfolio credit swaps, to credit swap indices.

Portfoliocredit swaps redistribute the credit risk of a credit swap portfolioacross different tranches. Each tranche represents a different level ofrisk of loss, with some tranches assuming the first losses and othersassuming further losses. Primary examples of portfolio credit swapsinclude synthetic collateralized debt obligations, or synthetic CDOs,and single tranche transactions.

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| •  | Synthetic CDOs involve the structuring andselling of a fully capitalized transaction that matches the notionalamount of the underlying credit swaps with income bearing securities.Synthetic CDOs are generally structured by dealers and sold toinvestors through private offerings. |

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| •  | Single tranche transactions are issuancesin which there is only one piece of the capitalization structure placedwith an investor. These transactions are generally structured bydealers and custom tailored for their investors. Dealers and theirinvestors negotiate the Reference Entities to be included in theunderlying credit swap portfolio and the risk position the investorwould like to assume against that portfolio. |

Credit swap indicesenable participants to either sell or buy credit protection against thecredit risk of a credit swap portfolio. In the past few years, severalindices have been developed by leading global financial institutions tooffer participants a diverse, liquid vehicle for assuming or hedgingexposure to different credit markets. These vehicles have increasedliquidity in the credit swap market and become industry benchmarks.

Corporate Structure

We are a Bermuda company that wasincorporated in 1998. Bermuda has a stable legal and regulatoryenvironment and has been an internationally recognized domicile forinsurers and other financial companies for many years. Bermuda hasadopted corporate, insurance, tax and exchange control laws, amongothers, that have attracted many companies with internationaloperations to incorporate in Bermuda. Bermuda does not tax suchcompanies on their income from sources outside Bermuda. PrimusFinancial and Primus Asset Management are organized in Delaware and areour principal operating subsidiaries. We own all of the votingsecurities of Primus Financial and Primus Asset Management through twointermediate holding companies. The first, Primus Group Holdings, Inc.,or Primus Group Holdings, a Delaware company, was formed to hold ourUnited States assets. The second, Primus (Bermuda) Ltd., (originallyPrimus (Barbados), Ltd., or Primus Barbados) was interposed betweenPrimus Guaranty and Primus Group Holdings because Barbados had a taxtreaty with the United States and Bermuda has no relevant tax treaty.The Barbados tax treaty, however, was recently amended. Therefore, asof December 31, 2004, we redomiciled Primus Barbados as Primus(Bermuda), Ltd., or Primus Bermuda, in Bermuda. We also have a Bermudaregistered insurer, Primus Re, which offers financial guarantyinsurance protection to companies that prefer insurance products tocredit swaps. We incorporated Primus Re in Bermuda to take advantage ofBermuda's status as an internationally recognized domicile forinsurers.

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PrimusFinancial

Primus Financial is a AAA/Aaa rated provider ofcredit protection with respect to investment grade Reference Entities.It sells credit protection to selected counterparties through creditswaps. Primus Financial may also purchase credit swap protection fromcounterparties on a limited basis when it believes that credit swappremiums for a Reference Entity are particularly low relative to therisk.

As of December 31, 2004, Primus Financial had $418.9million of capital resources to support its AAA/Aaa counterpartyratings. This capital consists of (1) $109.0 million of paid-in capitalcontributed to Primus Financial by Primus Guaranty on March 14, 2002,(2) $98.5 million of net proceeds from the issuance of Primus FinancialCumulative Preferred Stock issued on December 19, 2002, (3) $75.0million from the issuance of subordinated deferrable interest notes onJuly 23, 2004, (4) $60.0 million of paid-in-capital from our IPO whichwas completed on October 5, 2004, (5) $15.0 million of paid-in-capitalfrom Primus Group Holdings during 2004 and retained cash flow of$61.4  million. At December 31, 2004, the credit swaps in ourportfolio had an average maturity of 2.89 years. As of December 31,2004, Primus Financial had not suffered a credit loss. Though, many ofPrimus Financial's credit swaps are relatively new and theunderlying Reference Entities may not have had time to exhibitproblems. However, we closed out or off-set some credit swaps at a lossin order to mitigate credit risk.

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Credit Review and Approval Procedures

Primus Financial subjects each of the Reference Entities for whichwe are considering selling credit protection to a standardized creditreview and approval procedure that evaluates, assesses and documentsthe underlying credit risk of a particular Reference Entity. Thisprocedure is an essential step in determining whether we will sellprotection on that Reference Entity and results in the assignment of anindependent rating, or a Primus Rating, credit decision and positionlimit for each such entity. Inputs that support PrimusFinancial's credit decisions include the following:

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| •  | Standard and Poor's Rating Services,or S&P; and Moody's Investors Service, Inc., orMoody's, ratings and history; |

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| •  | industry and company specific analyses andresearch by major investment and commercial banks; |

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| •  | financial statement analysis of theReference Entity; |

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| •  | credit risk modelsbased on the value of the Reference Entity's assets; |

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| •  | financial market indicators including bondspreads, stock prices and credit swap premiums; and |

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| •  | current news on the Reference Entity andits industry. |

Primus Financial's credit approval processbenefits from the fact that the typical investment grade ReferenceEntity is a public company which has a current rating and ratinghistory, financial performance history and substantial company andthird-party information on its financial status and future businessprospects. Primus Financial's experienced risk managementprofessionals are responsible for its credit review and approvalprocedures. The approach to conducting a credit review results in thedesignation of a Primus Rating for all approved Reference Entities andis designed to generate consistent credit profiles and flag issues thatrequire further analysis. This iterative credit review process is alsodesigned to result in judgments that take advantage of all theavailable information in the marketplace. After the initial review, allReference Entities whose risks have been reviewed and for which a limithas been approved are periodically monitored.

Credit and RiskManagement Policies and Oversight

Policies governing the creditand risk management processes are set by the board of directors ofPrimus Financial. The responsibilities of the board include (1)reviewing and approving the credit-related policies and procedures ofPrimus Financial, (2) reviewing changes to its operating guidelines andcapital models and (3) reviewing capital levels and portfoliooptimization strategies.

Primus Financial's Pricing andPortfolio Management Committee, or PPMC, provides oversight of PrimusFinancial's portfolio and implements the policies and proceduresset by the board. The PPMC (1) reviews market conditions with a view toproviding guidance on portfolio priorities, (2) reviews deterioratingcredits and proposed hedging or terminating strategies and (3)periodically directs in-depth reviews by industry sector, the resultsof which are reported to the board.

Transaction Pricing andExecution

Investment activity is limited to Reference Entitiesapproved by, and position limits determined by, PrimusFinancial's credit professionals. Operating within thoseconstraints, Primus Financial's investment professionals makeinvestment decisions based on their view of risk-adjusted returnsavailable in the market.

Primus Financial's counterpartiesare primarily major global financial institutions that act in theircapacities as dealers and credit portfolio managers. Primus Financialreceives bids and offers for the purchase or sale of credit swaps on adaily basis. These bids and offers are communicated directly by itscounterparties, or through Primus Financial's access to messagesbroadcast by brokers to such brokers' subscribers. PrimusFinancial may also initiate a bid or offer in the same ways. PrimusFinancial receives pricing transparency and transaction opportunitiesfrom its counterparties on a daily basis.

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The premiums that Primus Financial receivesin connection with its transactions are largely determined by marketconditions affecting credit markets, and particularly credit swapmarkets, both generally and with respect to particular ReferenceEntities. Primus Financial's decision to effect a particulartransaction, and at a particular price within the confines of thecurrent market range, is determined by a number of considerationsincluding a comparative analysis of risk-adjusted returns for differentReference Entities, availability of capacity in particular ReferenceEntities and with particular counterparties, and the near-term outlookfor credit swap prices.

Credit Swap Portfolio

As ofDecember 31, 2004, our credit swaps sold portfolio totaled $10.5billion (in notional amount), which had a weighted average creditrating of A/A3 (S&P/Moody's), and represented 476Reference Entities spread across 39 industries in 23 countries. Thepercentages of our credit swaps that were denominated in United Statesdollars and Euros at December 31, 2004 were 70.7% and29.3%, respectively. Reference Entities that were domiciled inthe United States and outside the United States comprised 50.1%and 49.9%, respectively, of our credit swap portfolio atDecember 31, 2004.

The following charts provide a summaryof our portfolio as of December 31,2004:

Risk Management

Primus Financial monitors the Reference Entities in its credit swapportfolio on an ongoing basis. As part of the monitoring process, thereis a continual review of the Reference Entities' credit ratingsand financial reporting and our modeling analyses. Additionally, eachReference Entity in Primus Financial's credit swap portfolio isreassessed at least quarterly, at which point its Primus Rating isreconfirmed. If Primus Financial determines that the risk of a defaultor other credit event of a Reference Entity exceeds acceptable levels,Primus Financial can reduce or eliminate its credit exposure by buyingcredit protection against that Reference Entity or by terminating itscredit swaps referencing that Reference Entity.

From time totime, Primus Financial enters into transactions that reduce its riskpositions. These include unwinding credit swaps, assigning credit swapsto third parties (with a novation of its obligations) or purchasingcredit swaps that offset the risk of its positions. Risk reducingtransactions may be motivated by credit considerations or byexpectations regarding future price movements.

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Operating Guidelines

PrimusFinancial's operating guidelines have been negotiated withS&P and Moody's and specify various structural, portfolio andcapital constraints with which Primus Financial must comply in order tomaintain its highest counterparty credit ratings including (1) maximumcredit exposure limits to industries, countries and Reference Entities,(2) credit ratings requirements of Reference Entities that arereferenced in the credit swaps sold by Primus Financial and (3) maximumlength of exposure to any single Reference Entity.

As stipulatedin Primus Financial's operating guidelines, upon the occurrenceof certain events Primus Financial must temporarily cease entering intonew credit swaps until such event is cured. Events that would causePrimus Financial to cease entering into new credit swaps include acapital shortfall under the operating guidelines, the bankruptcy orother analogous event of Primus Financial, a violation of the operatingguidelines that is not cured within ten days upon the occurrence of acapital shortfall and 30 days in all other circumstances or a downgradeof Primus Financial to A ("strong") or A2("good financial security") or below byS&P or Moody's, respectively. If an event causing thecessation of new credit swaps is not cured, Primus Financial will notenter into new credit swaps and will run off its outstanding portfolioof credit swaps.

As required by the operating guidelines, PrimusFinancial has obtained a $37.5 million liquidity facility from HarrisTrust to provide it with additional liquidity, if necessary, toaccommodate the timely purchase of a physically settled deliverableobligation upon the occurrence of a credit event. The liquidityfacility has a maturity of one year and may be extended for successiveone-year periods upon the request of Primus Financial and with theconsent of Harris Trust. At December 31, 2004, the maturity date of theliquidity facility was March 2005. Primus Financial intends to requestan extension of this facility or replace it with a similar facilitywith another lender at each annual maturity date so long as it isrequired to do so by the operating guidelines. Primus Financial'sborrowings under the liquidity facility are secured by the investmentassets of Primus Financial.

Capital Models and VerificationProcess

We have developed customized capital models that arecash flow-based simulations of portfolio performance. There is a uniquecapital model for each of S&P and Moody's. Under itsoperating guidelines, Primus Financial is required to have an externalauditor (currently Ernst & Young LLP) provide to S&P andMoody's an agreed-upon-procedures report at least weekly. Theprocedures, which are specified by the rating agencies, consist oftesting the application of Primus Financial's operatingguidelines with respect to its credit swap portfolio. Agreed-uponprocedures reports of this kind are generally required by the ratingagencies for companies whose credit ratings depend upon their continuedcompliance with operating guidelines. Primus Financial intends tocontinue to hold sufficient capital resources to maintain its AAA/Aaaratings.

Primus Financial uses our customized capital models todetermine the sufficiency of its capital resources to meet the AAA/Aaarequirements of S&P and Moody's. The sufficiency of capitalresources is in part determined by: (1) the notional amount of eachcredit swap in the portfolio; (2) the term of each credit swap; (3) thecredit risk of each underlying Reference Entity; (4) credit swappremiums; (5) industry concentrations within the portfolio; and (6)Primus Financial's operating expenses and tax status.

Counterparties

Strengthening and expanding relationshipswith our counterparties is an important element of our business. Wehave expanded the number of counterparties to whom we sell credit swapsfrom 20 at December 31, 2002 and 31 at December 31, 2003, to 38 atDecember 31, 2004, primarily consisting of major global financialinstitutions. Primus Financial's top counterparty, and top fivecounterparties, represented 19.1% and 57.8% of PrimusFinancial's credit swap portfolio outstanding at December 31,2004, respectively. Three counterparties each accounted for more than10% of our consolidated net premium earned for the fiscal yearended December 31, 2004 totaling $6.4 million, $5.8 million and $4.4million, respectively.

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We enter into an ISDA master agreementwith each of our counterparties. These agreements govern the terms ofthe credit swap transactions we enter into. The ISDA master agreementdoes not obligate us to sell or our counterparites to buy credit swaps.The ISDA master agreement does allow us to conduct many separatetransactions with a counterparty on an efficient basis, each subjectonly to a specific confirmation. Our master agreement does not prohibitour counterparties from purchasing credit swaps from other entities nordoes it limit our ability to transact business with othercounterparties.

Bankruptcy Remoteness and Governance of PrimusFinancial

We have structured Primus Financial so that it shouldnot be consolidated with Primus Guaranty or any of its affiliates inthe event of its or their bankruptcy. This is an element necessary tomaintain Primus Financial's highest counterparty credit ratingsfrom the rating agencies. Components of this bankruptcy remotestructure include (1) a board of directors that includes twoindependent directors who are neither employees of Primus Financial orits affiliates nor directors of those affiliates and (2) a requirementthat all agreements with any affiliated company are effected on anarm's-length basis.

Primus Asset Management

Weprovide, through Primus Asset Management, credit risk investmentadvisory and asset management services to Primus Financial and thirdparties. We advise our clients on the evaluation, selection and pricingof all risks for credit protection, as well as monitor a client'scredit exposure and make recommendations as to hedging their creditrisks.

Primus Asset Management has entered into two agreementsunder which it acts as an investment advisor with respect to creditswap portfolios for third-party special purpose vehicles.

PrimusAsset Management is paid by Primus Financial on a cost plus basis.Advisory engagements from third parties generate fees based on apercentage of the amount of notional assets under management, and mayalso yield contingent fees based on performance.

Primus Re

Primus Re is a Bermuda company registered as a Class 3 insurer underthe Bermuda Insurance Act 1978, as amended, and related regulations, orthe Bermuda Insurance Act, and operates as a financial guarantyinsurance company. Financial guaranty insurance is a contract in whichan insurance company receives a fee to provide credit protection withrespect to a credit obligation and therefore provides a transfer ofrisk economically similar to a credit swap.

Primus Re'sbusiness is to act as a conduit, or transformer, between partiesinterested in buying or selling protection in insurance form and otherparties interested in assuming the opposite risk position in the formof credit swaps. Primus Re generates revenue by charging a higherinsurance premium for protection sold than the swap premium it pays forthe off-setting protection it purchases. Primus Re has conducted onlylimited activities through December 31, 2004.

Investments andInvestment Policy

Our investment portfolio has been invested inshort-term government securities, money-market instruments and otherinvestment grade securities. Primus Financial has engaged HarrisInvestment Management to assist in the management of its fixed incomeportfolio and Harris Trust to act as its custodian to hold itssecurities portfolio. Recently, Primus Financial decided to engageEvergreen Asset Management, a subsidiary of Wachovia Bank, and WachoviaBank, to provide these services, respectively. The operating guidelineslimit Primus Financial's investments primarily to United Statesgovernment and agency securities, maturing within three years.

Technology

Our platform was built specifically to effecttransactions in credit swaps and manage the resulting risks. Itprocesses and records all of our transactions, and immediatelygenerates confirming 

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documentation as trades are input, therebyreducing the risk of disputes and facilitating our acceptance bycounterparties as a professional market participant. Most constraintson our portfolio, including the operating guidelines and limits set byour credit professionals, are maintained in the platform, so thatnon-conforming transactions cannot be processed and compliance with allconstraints can be monitored on a real-time basis. The platformcontains extensive databases regarding Reference Entities, credit swapprices and other information required to generate financial andmanagement reports. Our technology has been protected from failurethrough a variety of security measures, and through the use of faulttolerant hardware at a separate location with fully redundantcommunication and power back-ups. The platform is designed to permitthe parallel processing of third party portfolios managed by PrimusAsset Management, alongside Primus Financial's portfolio. Thetechnology allows us to expand our activities at relatively lowincremental cost and it helps us to efficiently control and evaluateour business and to ensure compliance with rating agencyrequirements.

Certain Bermuda Law Considerations

As aholding company, Primus Guaranty is not subject to Bermuda insuranceregulations. However, the Bermuda Insurance Act regulates the insurancebusiness of Primus Re, which is registered under that Act. In thissection, when we refer to Primus Guaranty, we are referring solely toPrimus Guaranty, Ltd. and not to any of its consolidated operations.Certain significant aspects of the Bermuda insurance regulatoryframework and other relevant matters of Bermuda law are set forthbelow:

Primus Guaranty, Primus Bermuda and Primus Re have beendesignated as non-residents for exchange control purposes by theBermuda Monetary Authority, or BMA. Common shares of a Bermuda companymay be offered or sold in Bermuda only in compliance with theprovisions of the Investment Business Act, which regulates the sale ofsecurities in Bermuda. All three companies are each required to obtainthe prior permission of the BMA for the issuance and transferability oftheir shares. We have received consent from the BMA for the issue andfree transferability of the common shares of Primus Guaranty, as longas the shares of Primus Guaranty are listed on an appointed stockexchange (including the NYSE), to and among persons who arenon-residents of Bermuda for exchange control purposes.

PrimusGuaranty, Primus Bermuda and Primus Re have each been incorporated inBermuda as an "exempted company." UnderBermuda law, exempted companies are companies formed for the purpose ofconducting business outside Bermuda from a principal place in Bermuda.As a result, they are exempt from Bermuda laws restricting thepercentage of share capital that may be held by non-Bermudians, butthey may not participate in certain transactions, including (1) theacquisition or holding of land in Bermuda (except as may be requiredfor their business and held by way of lease or tenancy for terms of notmore than 50 years or which is used to provide accommodation orrecreational facilities for their officers and employees and held withthe consent of the Bermuda Minister of Finance, for a term notexceeding 21 years) without the express authorization of the Bermudalegislature, (2) the taking of mortgages on land in Bermuda to securean amount in excess of BD$50,000 without the consent of the BermudaMinister of Finance, (3) the acquisition of any bonds or debenturessecured by any land in Bermuda, other than certain types of Bermudagovernment securities or (4) the carrying on of business of any kind inBermuda, except in furtherance of their business carried on outsideBermuda (and certain other limited circumstances) or under licensegranted by the Bermuda Minister of Finance.

We must comply withthe provisions of the Bermuda Companies Act regulating the payment ofdividends, and making distributions from contributed surplus andrepurchases of shares. A Bermuda company shall not declare or pay adividend, or make a distribution out of contributed surplus, if thereare reasonable grounds for believing that: (a) the company is, or wouldafter the payment be, unable to pay its liabilities as they become due;or (b) the realizable value of the company's assets would therebybe less than the aggregate of its liabilities and its issued sharecapital and share premium accounts. Under the Bermuda Companies Act,when a Bermuda company issues shares at a premium (that is for a priceabove the par value), whether for cash or otherwise, a sum equal to the

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aggregate amount or value of the premium onthose shares must be transferred to an account called "theshare premium account." The provisions of the BermudaCompanies Act relating to the reduction of the share capital of acompany apply as if the share premium account were paid-up sharecapital of that company, except for certain matters such as premiumarising on a particular class of shares which may be used in paying upunissued shares to be issued to shareholders as fully paid bonusshares. The paid-up share capital may not be reduced if on the date thereduction is to be effected there are reasonable grounds for believingthat the company is, or after the reduction would be, unable to pay itsliabilities as they become due. Similarly, no purchase by a company ofits own shares may be effected if, on the date on which the purchase isto be effected, there are reasonable grounds for believing that thecompany is, or after the purchase would be, unable to pay itsliabilities as they become due.

Exempted companies, such asPrimus Guaranty, Primus Bermuda and Primus Re, must comply with Bermudaresident representation provisions under the Bermuda Companies Act.Under Bermuda law, non-Bermudians (other than spouses of Bermudians, orholders of a permanent resident's certificate, or holders of aworking resident's certificate) may not engage in any gainfuloccupation in Bermuda without an appropriate governmental work permit.A work permit may be granted or extended upon showing that, afterproper public advertisement, no Bermudian (or spouse of a Bermudian, orholder of a permanent resident's certificate, or holder of aworking resident's certificate) is available who meets theminimum standards reasonably required by the employer. The currentpolicy of the Bermuda government is to place a six-year term limit onindividuals with work permits, subject to certain exemptions for keyemployees. There are employee protection laws and social security lawsin Bermuda that will apply if we ever have employees based inBermuda.

The Bermuda Insurance Act    The BermudaInsurance Act imposes on insurance companies certain solvency andliquidity standards; certain restrictions on the declaration andpayment of dividends and distributions; certain restrictions on thereduction of statutory capital; and certain auditing and reportingrequirements and also the need to have a principal representative and aprincipal office (as understood under the Bermuda Insurance Act) inBermuda. Primus Re's principal representative is currently MarshManagement Services (Bermuda) Ltd. The Bermuda Insurance Act grants tothe BMA the power to cancel licenses, supervise, investigate andintervene in the affairs of insurance companies and in certaincircumstances share information with foreign regulators. The BermudaInsurance Act distinguishes between insurers carrying on long-termbusiness and insurers carrying on general business. There are fourclassifications of insurers carrying on general business, with Class 4insurers subject to the strictest regulation and Class 3 insurerssubject to the next strictest regulation. Primus Re is registered as aClass 3 insurer and is regulated as such under the Bermuda InsuranceAct. Class 3 insurers are authorized to carry on general insurancebusiness (as understood under the Bermuda Insurance Act), subject toconditions attached to their license and to compliance with minimumcapital and surplus requirements, solvency margin, liquidity ratios andother requirements imposed by the Bermuda Insurance Act.

As aClass 3 insurer: (1) Primus Re is required to maintain the generalbusiness solvency margin which is a minimum solvency margin equal tothe greatest of: (A) $1,000,000; (B) 20% of net premiums writtenup to $6,000,000 plus 15% of net premiums written over$6,000,000; or (C) 15% of loss and other insurance reserves; (2)at any time Primus Re fails to meet its general business solvencymargin it must, within 30 days after becoming aware of that failure orhaving reason to believe that such failure has occurred, file with theBMA a written report containing particulars of the circumstancesleading to the failure and of the manner and time within which itintends to rectify the failure; (3) Primus Re is prohibited fromdeclaring or paying any dividends at any time it is in breach of itsgeneral business solvency margin or the required minimum liquidityratio, or if the declaration or payment of such dividends would causeit to fail to meet such margin or ratio, and if it has failed to meetits minimum solvency margin or minimum liquidity ratio on the last dayof any financial year, Primus Re will be prohibited, without theapproval of the BMA, from declaring or paying any dividends during thenext financial year; and (4) Primus Re is prohibited, without the priorapproval of the BMA, from reducing by 15% or more its totalstatutory capital (which includes contributed surplus, paid in capitaland share premium) as set out in its previous year's financialstatements. 

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Primus Re is required annually to filestatutorily mandated financial statements and returns, audited by anindependent auditor approved by the BMA, together with an annual lossreserve opinion of a BMA approved loss reserve specialist.

Primus Re, Ltd. Act 2000.    Primus Re has obtained privateBermuda legislation, entitled the "Primus Re, Ltd. Act2000", or Private Act, from the Bermuda Legislature thatenables it to operate separate accounts (as defined in the PrivateAct), subject to the provisions of the Private Act. The expected resultis that the assets of one separate account are protected from theliabilities of other accounts, with the result that only the assets ofa particular separate account may be applied to the liabilities of thatseparate account. Pursuant to the Private Act, the assets andliabilities of a separate account are treated as a separate fund fromPrimus Re's own general assets and liabilities or the assets andliabilities arising from any other separate accounts, and, in aninsolvency proceeding pursuant to Bermuda law, it is expected that aliquidator will be bound to respect the sanctity of such separateaccounts. There are no Bermuda court decisions on the efficacy ofseparate accounts.

Competition

The business of sellingcredit protection in the form of credit swaps is highly competitive.Competition is based on many factors, including the general reputation,service and perceived financial strength of the protection seller, thepricing of the credit swap protection (i.e., the premium to bepaid by the protection buyer for the credit swap) and other terms andconditions of the credit swap. While there are many participants in thecredit swap industry, we believe that Primus Financial iswell-positioned as a AAA/Aaa rated (S&P/Moody's) companydedicated to providing credit swap protection to credit swap dealersand credit portfolio managers. Unlike other participants in the creditswap market, our business model is based on the differential betweenreturns available from credit swap premiums and the underlying risk,combined with our efficient operating and capital structure.

Credit Ratings

Ratings by independent agencies are animportant factor in establishing the competitive position ofcounterparties in the credit swap market and are important to ourability to sell credit swaps. Rating organizations continually reviewthe financial positions of counterparties in the credit swap market,including us. S&P maintains a letter scale rating system rangingfrom "AAA" ("extremelystrong") to "CC"("currently highly vulnerable").Moody's maintains a letter scale rating system ranging from"Aaa"("exceptional") to"C" ("lowestrated"). Primus Financial has been rated"AAA" ("extremelystrong") by S&P, which is the highest of twenty-onerating levels, and "Aaa"("exceptional") by Moody's, which isalso the highest of twenty-one rating levels. The objective ofS&P's and Moody's rating systems is to assistcounterparties by providing an opinion of a counterparty'sfinancial strength and ability to meet ongoing obligations to itscounterparties. These ratings reflect S&P's and Moody'sopinions of our ability to pay a counterparty upon a credit event andare not applicable to our common shares. These ratings are subject toperiodic review by, and may be revised downward or revoked at the solediscretion of, S&P and Moody's.

Credit SwapDocumentation

The overall trading relationship between partiesto a credit swap is typically governed by an ISDA master agreement thatsets the general and ongoing legal and credit terms between the partiesand contains express provisions for netting of payment obligations. Oneof the principal benefits of using ISDA documentation is the ease ofcompleting individual credit swaps with counterparties.

The ISDAmaster agreement consists of a printed form that includes typicalcontract terms such as representations and warranties, covenants,events of default and remedies after default and a schedule ofelections and modifications to the printed form. The ISDA masteragreement is designed to allow Primus Financial and a counterparty todocument all of their credit swap transactions under a singleagreement.

Individual credit swap transactions are documentedunder separate confirmations that set forth the particular terms ofsuch transaction. Each confirmation supplements and is subject to theISDA master agreement.

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Employees

As of December 31,2004, we had 33 employees, none of whom is located in Bermuda. None ofour employees is party to a collective bargaining agreement orrepresented by any labor organization. We consider our relations withour employees to be good.

Additional Information

Wemake available, free of charge, access to our Annual Report on Form10-K, Quarterly Reports on Form  10-Q, Current Reports onForm  8-K, Section 16(a) filings, our Proxy Statement, and allamendments to those reports as soon as reasonably practicable aftersuch reports are electronically filed with, or furnished to, the UnitedStates Securities and Exchange Commission, or SEC, through our homepage at www.primusguaranty.com.

Risk Factors

Thefailure to manage effectively the risk of credit losses could have amaterial adverse effect on our financial condition, results ofoperations and credit ratings.

We cannot assure you that anyof the loss mitigation methods we use in managing our credit swapportfolio will be effective. If, for example, multiple credit defaultsor other credit events that exceed our expectations occur within ashort time period, the payments we would be required to make under therelated credit swaps could materially and adversely affect ourfinancial condition, results of operations and credit ratings. Many ofPrimus Financial's credit swaps are new and the underlyingReference Entities may not have had time to exhibit problems. Moreover,even though we may identify a heightened risk of default with respectto a particular Reference Entity, our ability to limit our losses, suchas through hedging or terminating the credit swap, before a default orother credit event actually occurs could be limited by inadequateliquidity in the credit swap market. We also intend to enter into newbusinesses, including selling credit swaps referencing obligations ofReference Entities that are below investment grade, which may not havethe same or similar loss limitation methods. We have not initially soldcredit swaps on Reference Entities that are below investment grade.There can be no assurance that we will be able to manage higher risksof credit losses effectively or that any of our existing lossmitigation methods will be effective in any of these newbusinesses.

Primus Financial's operating guidelines andS&P's and Moody's capital requirements are subject tochange and may limit our growth. Additionally, a decline in our currentcounterparty credit ratings from S&P and Moody's would likelyhave a material adverse impact on our business and cause our revenuesand earnings to decrease.

In order to obtain and maintainits counterparty credit ratings, Primus Financial has adopted operatingguidelines, the terms of which have been agreed upon with S&P andMoody's. We cannot assure you that S&P and Moody's willnot require changes to Primus Financial's operating guidelines orthat, if such changes are made, Primus Financial will be able to complywith them. For example, if S&P and Moody's were to requirePrimus Financial to maintain additional capital to retain its AAA/Aaaratings, we cannot be certain that we could raise additional capitalwhen needed. Moreover, if Primus Financial suffers losses to such anextent that it is not in compliance with the capital criteria of itsoperating guidelines and it is not able to cure the capital deficiencyin a timely manner, its operating guidelines require it to ceaseentering into new credit swaps (except for limited hedgingtransactions, as described in the operating guidelines). If theforegoing occur, S&P and Moody's could reduce or withdrawtheir AAA/Aaa credit ratings of Primus Financial which, in turn, wouldlikely have a material adverse effect on our business and our financialperformance.

We are dependent on counterparties'perception of our creditworthiness.

In establishingrelationships, Primus Financial's counterparties generallyanalyze its financial condition prior to entering into a credit swap,establish credit limits, and monitor the appropriateness of theselimits on an ongoing basis to limit the risk that it will befinancially unable to make payments 

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in accordance with the credit swap. Once acounterparty reaches its credit exposure limit to Primus Financial, thecounterparty may not enter into any additional transactions with PrimusFinancial until the counterparty credit limit is increased. In theevent these counterparty credit limits are not increased as PrimusFinancial's credit swap portfolio expands, or if limits arereduced, our financial performance would suffer. In addition, whilethere are buyers of credit swaps, such as our existing counterparties,that do not require us to post collateral, there are some buyers,including some of the leading participants in the credit swap market,that require even the highest rated counterparties from which theypurchase credit swaps to post collateral. Under the operatingguidelines, Primus Financial cannot enter into credit swaps with anycounterparty who would require it to post collateral. If our existingcounterparties were to require us to post collateral, it may have amaterial adverse effect on us and our financial condition and restrictour growth.

We depend on a limited number of keyexecutives.

The loss of any of our key personnel, includingThomas Jasper, our chief executive officer, other directors, executiveofficers, or other key employees, many of whom have long-standingrelationships with our counterparties, could have a material adverseeffect on us. As our business develops and expands, we believe that oursuccess will depend greatly on our continued ability to attract andretain highly skilled and qualified personnel. We cannot assure youthat we will continue to be able to employ key personnel or that wewill be able to attract and retain qualified personnel in the future.We do not have "key person" life insurance tocover our executive officers. We do not have employment contracts withall of our executive officers and key employees. Failure to retain orattract key personnel could have a material adverse effect on us.

We have a limited operating history, and our future performanceis uncertain.

We and our subsidiaries are relatively newcompanies with a narrow business focus and limited operating histories.As a result, there is limited historical financial and operatinginformation available to help you evaluate our past performance or tomake a decision about an investment in our common shares. Companies intheir initial stages of development present substantial business andfinancial risks and may suffer significant losses. New companies mustsuccessfully develop business relationships, establish operatingprocedures, hire staff, install management information and othersystems, establish facilities and obtain licenses, as well as takeother steps necessary to conduct their intended business activities. Asa result of these risks, it is possible that we may not be successfulin implementing our business strategy or in completing the developmentof the infrastructure necessary to run our business. In addition,because of our limited operating history, our historical financialresults may not accurately predict our future performance. Because ofour narrow business focus, we face a greater exposure to changes anddownturns within our industry than do companies with more diversifiedlines of business. For example, as a result of industry factors orfactors specific to us, we may have to alter our anticipated methods ofconducting our business, such as the nature, amount and types of riskswe assume.

Our financial results depend on certain marketconditions and growth in the credit swap market which are not withinour control.

Our financial results depend to a significantdegree upon the premiums that we receive on credit swaps in ourportfolio. Historically, these premiums have been a function of creditspreads that change over time as a result of a variety of factors thatwe do not control, including changes in the overall economy, supply anddemand conditions in the credit swap market and other factors affectingthe corporate credit markets in general. If a low credit swap premiumenvironment develops and persists, we may not be able to achieveprofitable growth, which may have a material adverse effect on ourfinancial condition and our results of operations. In addition, therecan be no assurance that the credit swap market will continue to growas it has historically or at all or that it will not decline. Any suchdecline could have a material adverse effect on our business andfinancial condition and restrict our growth.

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Variations in credit swap premiums couldcause our earnings to be inconsistent and our share price to fluctuatesignificantly.

Any event causing credit swap premiums to widenor tighten on an underlying Reference Entity in our portfolio willaffect the fair value of related credit swaps and may increase thevolatility of our reported earnings and, in turn, our share price.Common events that may cause our credit swap premiums to fluctuateinclude changes in national or regional economic conditions, industrycyclicality, credit events within an industry, changes in a ReferenceEntity's operating results, credit rating, cost of funds,management or any other factors leading investors to reviseexpectations about a Reference Entity's ability to pay principaland interest on its debt obligations when due. Changes in fair value ofour credit swaps are recorded as unrealized gains or losses in ourconsolidated income statement. Wide fluctuations in the premium levelsthat we receive on credit swaps in our portfolio may have a materialeffect on our reported results of operations. In 2003, a decline inpremium levels caused an increase in the fair value of our credit swapportfolio, which resulted in net unrealized gain of $46.7 million, or44.1% of our consolidated revenues for the year ended December31, 2003. At December 31, 2004, premium levels were fairly consistentwith those of the prior year-end, which led to a decrease in the fairvalue of our credit swap portfolio, and a net unrealized loss of $0.3million.

We may require additional capital in the future whichmay not be available on favorable terms or at all.

If werequire additional capital, we may need to raise additional fundsthrough financings or curtail our growth and reduce our assets. Anyequity or debt financing, if available at all, may be on terms that arenot favorable to us. In the case of equity financings, dilution to ourshareholders could result, and in any case such securities may haverights, preferences and privileges that are senior to those of ourcommon shares. If we cannot obtain adequate capital, our business,results of operations and financial condition could be adverselyaffected.

Certain of our principal shareholders controlus.

At December 31, 2004, our principal shareholders (by whichwe mean those institutions that owned shares prior to our IPO),directors and executive officers and entities affiliated with them ownapproximately 75.4% of our outstanding common shares. As aresult, these shareholders, collectively, are able to control theelection of our directors, determine our corporate and managementpolicies and determine, without the consent of our other shareholders,the outcome of any corporate action submitted to our shareholders forapproval, including potential mergers, amalgamations or acquisitions,asset sales and other significant corporate transactions. Theseshareholders also have sufficient voting power to amend ourorganizational documents. We cannot assure you that the interests ofour principal shareholders will coincide with the interests of otherholders of our common shares. This concentration of ownership may alsodiscourage, delay or prevent a change in control of our company, whichcould deprive our shareholders of an opportunity to receive a premiumfor their common shares as part of a sale of our company and mightreduce our share price.

The commercial and investmentactivities of some of our principal shareholders may compete with ourbusiness.

In addition, certain of our principal shareholders ortheir affiliates engage in commercial activities and enter intotransactions or agreements with us or in competition with us. Some ofour principal shareholders or their affiliates may in the futuresponsor other entities engaged in the credit swap business, some ofwhich may compete with us. Certain of our shareholders and theiraffiliates have also entered into agreements with and made investmentsin numerous companies that may compete with us. Our shareholders mayalso pursue acquisition opportunities that may be complementary to ourbusiness, and as a result, those acquisition opportunities may not beavailable to us. So long as our principal shareholders continue to owna significant amount of our outstanding common shares, they willcontinue to be able to influence strongly or effectively control ourdecisions.

We do not intend to pay cash dividends on our commonshares for the foreseeable future.

We do not intend to pay cashdividends on our common shares for the foreseeable future. We intend toretain all available funds for use in the operation and expansion ofour business. 

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Additionally, we are a holding company withno operations or significant assets other than our ownership of all ofour subsidiaries. There are certain restrictions on Primus Financialcontained in its operating guidelines, which could affect the abilityof Primus Guaranty to pay dividends in future years. The payment ofdividends and making of distributions by each of Primus Guaranty,Primus Bermuda and Primus Re is limited under Bermuda law andregulations. Any determination to pay cash dividends will be at thediscretion of our board of directors and will be dependent upon ourresults of operations and cash flows, our financial position andcapital requirements, general business conditions, legal, tax,regulatory and any contractual restrictions on the payment of dividendsand any other factors our board of directors deems relevant.

Wemay not be able to continue to compete in the credit swap market.

The credit swap market is highly competitive. We face competitionfrom providers of similar products, including certain insurancecompanies and affiliates of our principal shareholders, and, to alimited extent, the credit swap dealers of commercial and investmentbanks. Many of these competitors are more established, havesubstantially greater financial resources than we do and haveestablished ongoing relationships with market participants giving themready access to the credit swap marketplace. In addition, while thereare significant business obstacles to overcome in establishing asimilar enterprise to ours, there are no regulatory impediments for anynew entrants to the credit swap market. To the extent new participantsenter the credit swap market, competition may intensify. While webelieve we have a number of competitive advantages over new entrants,there can be no assurance that increased competition will notmaterially adversely affect our business and financial condition.

We cannot assure you that we will not incur losses as we beginselling credit swap protection on tranches of pools of obligations ofReference Entities and selling credit swaps for non-investment gradeobligations. We also cannot assure you that we will not incur losses aswe continue to purchase credit protection.

We cannot assure youthat we will not incur losses from selling credit swap protection ontranches of obligations of multiple Reference Entities. Additionally,we may enter into the credit swap market for non-investment gradeobligations, where the risk of credit losses is typically higher thanin our existing business. If we do not accurately analyze the ReferenceEntity credit risks and assess the risks and leverage associated withselling credit protection for tranches of these pools, then we maysuffer unexpected losses, which could adversely affect our results ofoperations and our credit ratings.

On a limited basis wepurchase credit swap protection to take advantage of short-term marketfluctuations. The notional amount outstanding on credit swaps wepurchased as short-term investments was $468.2  million atDecember 31, 2004. This is a different activity from our normal courseinvesting activity and is highly dependent on the absolute level ofcredit swap premiums, premium volatility and credit selection andthrough December 31, 2004 has resulted in a net loss. We cannot predictthat opportunities will exist for us to buy protection nor can weassure you that we will not continue to incur losses from thisactivity.

There can be no assurance that our diversificationstrategy will be effective or profitable.

We may experiencedelays, regulatory impediments and other complications in implementingour diversification strategy that could reduce our profitability andultimately cause the strategy to fail. This may include obtainingrating agency approvals and required licenses and registrations,adapting our technology platform, hiring personnel and raising capital.We plan to diversify through the development and marketing of ancillarybusinesses, such as asset management for third parties and, in selectinstances, by acquisition. Each new business line may require theinvestment of additional capital and the significant involvement of oursenior management to acquire or develop a new line of business andintegrate it with our operations.

We may have difficultyexecuting our growth strategy and managing our growth effectively.

Continuing to grow our business will require increased investment inpersonnel and the assumption of risks that may be greater than we havepreviously assumed. Unless our growth results 

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in an increase in our revenues that isproportionate to the increase in our costs associated with this growth,our gross margin and our future profitability, will be adverselyaffected.

We may be adversely affected by foreign currencyfluctuations.

We enter into credit swaps under which we areobligated to pay losses in currencies other than United States dollars.We may, from time to time, experience losses from fluctuations in thevalues of non-United States currencies, which could significantlyaffect our results of operations. Credit swap premiums onEuro-denominated credit swaps are paid to us in Euros and currently wedo not convert such premiums into United States dollars. However, allof our capital is United States dollar-denominated. We cannot assureyou that the credit swap premiums retained will be sufficient to coverEuro-denominated losses and that we will not incur significantconversion costs in order to cover such losses.

Our operationsmay become subject to increased regulation under federal and state lawor existing regulations may change, which may result in administrativeburdens, increased costs or other adverse consequences for us.

There can be no assurance that new legal or administrativeinterpretations or regulations under the United States commodities andsecurities laws, or other applicable legislation on the federal orstate levels, or in Bermuda or other applicable jurisdictions, will notresult in administrative burdens, increased costs, or other adverseconsequences for us. Periodically, proposals have been made in Congressto enact legislation that would increase regulation of the credit swapmarket. We cannot predict what restrictions any such legislation, ifadopted, would impose and the effect those restrictions would have onour business. In addition, federal statutes allocate responsibility forinsurance regulation to the states and state insurance regulators mayinterpret their state insurance laws to include credit swaps asinsurance contracts subject to regulation. Again, we cannot predictwhat effect any such regulation would have on our business.

Credit swap buyers typically use credit swaps to manage risk andregulatory capital requirements that limit their credit exposure to aReference Entity. Regulatory changes that modify the permissible limitsof credit risk exposure, or affect the use of Credit Swaps to reducerisk, may have a material adverse effect on our business.

Inaddition, we believe that we are not required to be registered as an"investment company" under the InvestmentCompany Act of 1940. If we are required to so register as an investmentcompany, we would have to comply with a variety of restrictions,including limitations on our capital structure, restrictions on ourinvestments, prohibitions on transactions with affiliates andcompliance requirements that could limit our growth and increase ourcosts. There is no assurance that we could function effectively if weare required to register as an investment company.

RisksRelated to Taxation

Our status as a PFIC may result insignificant additional tax costs for shareholders who are United Statestaxpayers.

Primus Guaranty and Primus Bermuda are likely to beand remain Passive Foreign Investment Companies, or PFICs, for UnitedStates federal income tax purposes. There are potentially adverseUnited States federal income tax consequences of investing in a PFICfor a shareholder who is a United States taxpayer. These consequencesinclude the following: (1) if a shareholder makes a"qualified electing fund", or QEF, electionwith respect to Primus Guaranty and Primus Bermuda, the shareholderwill have to include annually in his or her taxable income an amountreflecting an allocable share of the income of Primus Guaranty orPrimus Bermuda, regardless of whether dividends are paid by PrimusGuaranty to the shareholder, (2) if a shareholder makes amark-to-market election with respect to Primus Guaranty, theshareholder will have to include annually in his or her taxable incomean amount reflecting any year-end increases in the price of our

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common shares, regardless of whetherdividends are paid by Primus Guaranty to the shareholder (moreover, itis unclear how such an election would affect the shareholder withrespect to Primus Bermuda), and (3) if a shareholder does not make aQEF election or a mark-to-market election, he or she may incursignificant additional United States federal income taxes with respectto dividends on, or gain from, the sale or other disposition of, ourcommon shares, or with respect to dividends from Primus Bermuda to us,or with respect to our gain on any sale or other disposition of PrimusBermuda shares. See "Tax Considerations-Taxation ofShareholders-United States Holders-Passive Foreign InvestmentCompanies."

If we are found to be engaged in aUnited States business, we may be liable for significant United Statestaxes.

We believe that Primus Guaranty and Primus Bermuda, bothdirectly and through Primus Bermuda's indirect ownership interestin Primus Financial (which for United States federal income taxpurposes is treated as a partnership interest), will operate theirbusinesses in a manner that should not result in their being treated asengaged in a trade or business within the United States. In particular,we believe that the sales of credit swaps by Primus Financial are besttreated as transactions of an investor or trader and thus should not betreated as the conduct of a United States trade or business.Consequently, we do not expect to pay United States corporate income orbranch profits tax on Primus Financial's income. However, becausethe determination of whether a foreign corporation is engaged in atrade or business in the United States is inherently factual and thereare no definitive standards for making such a determination, there canbe no assurance that the United States Internal Revenue Service, orIRS, will not contend successfully that Primus Guaranty, Primus Bermudaor Primus Financial are engaged in a trade or business in the UnitedStates. The maximum combined rate of United States corporate federal,state and local income tax that could apply to Primus Financial orPrimus Bermuda, were they found to be engaged in a United Statesbusiness in New York City and subject to income tax, is approximately46%. This combined income tax rate does not include UnitedStates branch profits tax that would be imposed on Primus Bermuda werePrimus Financial found to be engaged in a United States business anddeemed to be making distributions to Primus Bermuda. The branch profitstax, were it to apply, would apply at the rate of 30% on amountsdeemed distributed.

If the IRS successfully challenges thetreatment Primus Financial has adopted for its credit swaptransactions, the timing and character of taxable income recognized byPrimus Financial could be adversely affected.

Consistent withits treatment of the credit swaps sold by Primus Financial as the saleof options for United States federal income tax purposes, we havedetermined that in general Primus Financial will recognize income orloss as a protection seller only upon default or termination of thecredit swaps. There is no definitive authority in support of thetreatment by Primus Financial of its credit swaps as options for UnitedStates federal income tax purposes, and we do not intend to seek aruling from the IRS on this point. In addition, the IRS has beenstudying the treatment of derivative transactions generally, includingcredit swaps, and has recently issued a notice requesting submissionsfrom taxpayers regarding the manner in which they conduct their creditswap activities and indicating that the United States Department of theTreasury and the IRS are contemplating issuing specific guidance inthis area. No assurance can be given as to whether or when suchguidance may be issued, whether it would be applied retroactively orwhether it will be adverse to Primus Financial. Certain proposals underdiscussion could be inconsistent with the tax treatment adopted byPrimus Financial. If the IRS were to assert successfully that thecredit swaps sold by Primus Financial should be treated differently orthese proposals were adopted, (1) the timing of the income recognizedby Primus Financial could be accelerated, (2) the character of thisincome could be altered and (3) Primus Bermuda, as a non-United Statesperson, could be subject to United States income or withholding tax atthe rate of 30%. In addition, were these changes in character toapply and were Primus Bermuda (through its investment in PrimusFinancial) found to be engaged in a United States trade or business,Primus Bermuda's recognition of taxable income would beaccelerated.

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Risks Related to our Status as a BermudaCompany

All references in this section to Primus Guaranty donot include its combined operations.

It may be difficult toenforce service of process and enforcement of judgments against us andour officers and directors.

Because Primus Guaranty isorganized under the laws of Bermuda, it may not be possible to enforcecourt judgments obtained in the United States against Primus Guarantybased on the civil liability provisions of the federal or statesecurities laws of the United States in Bermuda or in countries otherthan the United States where Primus Guaranty has assets. In addition,there is some doubt as to whether the courts of Bermuda and othercountries would recognize or enforce judgments of United States courtsobtained against Primus Guaranty or its directors or officers based onthe civil liabilities provisions of the federal or state securitieslaws of the United States, or would hear actions against PrimusGuaranty or those persons based on those laws. We have been advised byour legal advisors in Bermuda that the United States and Bermuda do notcurrently have a treaty providing for the reciprocal recognition andenforcement of judgments in civil and commercial matters. Therefore, afinal judgment for the payment of money rendered by any federal orstate court in the United States based on civil liability, whether ornot based solely on United States federal or state securities law,would not automatically be enforceable in Bermuda. There are groundsupon which a Bermuda court may not enforce the judgments of UnitedStates courts and some remedies available under the laws of UnitedStates jurisdictions, including some remedies available under UnitedStates federal securities laws, may not be permitted under Bermudacourts as contrary to public policy in Bermuda. Similarly, thosejudgments may not be enforceable in countries other than the UnitedStates where Primus Guaranty has assets. Further, no claim may bebrought in Bermuda by or against Primus Guaranty or its directors andofficers in the first instance for violation of United States federalsecurities laws because these laws have no extraterritorial applicationunder Bermuda law and do not have force of law in Bermuda; however, aBermuda court may impose civil liability, including the possibility ofmonetary damages, on Primus Guaranty or its directors and officers ifthe facts alleged in a complaint constitute or give rise to a cause ofaction under Bermuda law.

United States persons who own ourcommon shares may have more difficulty in protecting their intereststhan United States persons who are shareholders of a United StatesCorporation.

The Companies Act 1981, as amended, of Bermuda, orthe Bermuda Companies Act, which applies to Primus Guaranty and PrimusRe, differs in certain material respects from laws generally applicableto United States corporations and their shareholders. As a result ofthese differences, United States persons who own our common shares mayhave more difficulty protecting their interests than would UnitedStates persons who own common shares of a United Statescorporation.

We may become subject to taxes in Bermuda after2016, which may have a material adverse effect on our financialcondition and operating results and on an investment in our commonshares.

The Bermuda Minister of Finance, under the ExemptedUndertakings Tax Protection Act 1966, as amended, of Bermuda, has giveneach of Primus Guaranty and Primus Re an assurance that if anylegislation is enacted in Bermuda that would impose tax computed onprofits or income, or computed on any capital asset, gain orappreciation, or any tax in the nature of estate duty or inheritancetax, then subject to certain limitations, the imposition of any suchtax will not be applicable to Primus Guaranty, Primus Re or any oftheir respective operations, shares, debentures or other obligationsuntil March 28, 2016. Given the limited duration of the Minister ofFinance's assurance, we cannot be certain that we will not besubject to any Bermuda tax after March 28, 2016. Since we areincorporated in Bermuda, we will be subject to changes of law orregulation in Bermuda that may have an adverse impact on ouroperations, including imposition of tax liability.

The effectof Bermuda's letter of commitment to the OECD to eliminateharmful tax practices is uncertain and could adversely affect our taxstatus in Bermuda.

A number of multinational organizations,including the Organization for Economic Cooperation and Development,the European Union, the Financial Action Task Force and the FinancialStability 

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Forum, have all recently identified somecountries as not participating in adequate information exchange,engaging in harmful tax practices or not maintaining adequate controlsto prevent corruption, such as money laundering activities. TheOrganization for Economic Cooperation and Development, which iscommonly referred to as the OECD, has published reports and launched aglobal dialogue among member and non-member countries on measures tolimit harmful tax competition. These measures are largely directed atcounteracting the effects of tax havens and preferential tax regimes incountries around the world. In the OECD's report published inJune 2000, Bermuda was not listed, and continues not to be listed as an"uncooperative tax haven" because it hadpreviously signed a letter committing itself to eliminate harmful taxpractices by the end of 2005, and to embrace international taxstandards for transparency, exchange of information and the eliminationof any aspects of the regimes for financial and other services thatattract business with no substantial domestic activity. However, it ispossible that the OECD could change its view in the future and decideto list Bermuda as an uncooperative tax haven, or that one of the othermultinational organizations could take a different view from the OECDand decide to recommend sanctions against Bermuda. We are not able topredict what changes will arise from the commitment or whether suchchanges will subject us to additional taxes and reduce our netincome.

TAX CONSIDERATIONS

The following summary of thetaxation of holders of common shares of Primus Guaranty and thetaxation of Primus Guaranty and its subsidiaries describes the materialBermuda and United States federal income tax considerations as of thedate of this document. The summary is for general information only anddoes not purport to be a complete analysis or listing of all taxconsiderations that may be applicable, nor does it address the effectof any potentially applicable United States state or local tax laws, orthe tax laws of any jurisdiction outside the United States or Bermuda.The tax treatment of a holder of common shares for United Statesfederal, state, local, and non-United States tax purposes may varydepending on the holder's particular status. Legislative,judicial, or administrative changes may be forthcoming, includingchanges that could have a retroactive effect that could affect thissummary. Primus Guaranty does not intend to seek a tax ruling withrespect to any of the issues described below. All statements herein,with respect to facts, determinations, or conclusions relating to thebusiness or activities of Primus Guaranty and its subsidiaries, havebeen provided by us. All references in the following summary withregard to Bermuda taxation to Primus Guaranty do not include itscombined operations.

Prospective investors are urged to consulttheir own tax advisors concerning their particular circumstances andthe United States federal, state, local, and non-United States taxconsequences to them of owning and disposing of our common shares.

Taxation of Shareholders

BermudaTaxation

Under current Bermuda law, dividends paid by PrimusGuaranty to holders of common shares will not be subject to Bermudawithholding tax.

United States Taxation

Except as notedin this sentence, the following summary addresses the material UnitedStates federal income tax consequences with respect to common sharesacquired by investors in this offering and held as capital assets anddoes not deal with the tax consequences applicable to all categories ofinvestors, some of which (such as broker-dealers; banks; insurancecompanies; tax-exempt entities; investors who own, or are deemed toown, 10% or more of the total combined voting power or value ofPrimus Guaranty; investors who hold or will hold common shares as partof hedging or conversion transactions; investors subject to the UnitedStates federal alternative minimum tax; investors that have a principalplace of business or "tax home" outside theUnited States; and investors whose functional currency is not theUnited States dollar) may be subject to special rules. Prospective

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investors in common shares are advised toconsult their own tax advisors with respect to their particularcircumstances and with respect to the effects of United States federal,state, local, or other countries' tax laws to which they may besubject.

United States Holders

Except as noted in thefirst sentence of the preceding paragraph, the following discussionsummarizes the material United States federal income tax consequencesrelating to the ownership and disposition of our common shares by abeneficial owner thereof that is for United States federal income taxpurposes (i) an individual citizen or resident of the United States,(ii) a corporation, or other entity taxable as a corporation, createdor organized in or under the laws of the United States or any politicalsubdivision thereof, or (iii) an estate or trust the income of which issubject to United States federal income taxation regardless of itssource.

As discussed in greater detail below under"—Passive Foreign Investment Companies"and "Taxation of Primus Guaranty and itsSubsidiaries—United States Taxation—Primus Guaranty, PrimusBermuda and Primus Financial", based on ourrepresentations and subject to the limitations and caveats describedbelow, U.S. Tax Counsel believes that (1) neither Primus Guaranty norPrimus Bermuda should be treated as engaged in a trade or businesswithin the United States and (2) Primus Guaranty and Primus Bermudashould be and continue to be PFICs for United States federal income taxpurposes. This discussion assumes both of these conclusions, unlessotherwise stated.

Passive Foreign InvestmentCompanies.    Special and adverse United States federal incometax rules apply to shareholders who are direct or indirect owners offoreign corporations that are PFICs. In general, a foreign corporationwill be a PFIC if 75% or more of its gross income constitutes"passive income" or 50% or more of itsassets produce passive income. Various rules require that a foreigncorporation look through its ownership interest in lower-tiersubsidiaries in determining whether it satisfies the"asset" or the"income" test. Based on the operations,assets and income of our entire group, and in particular theoperations, assets and income of Primus Financial, Primus Guarantybelieves that both Primus Guaranty and Primus Bermuda should satisfyeither or both of the "income" or"asset" tests and as a result should be andcontinue to be PFICs. If it were determined that PrimusFinancial's activities with respect to credit swaps constituted aUnited States trade or business, Primus Guaranty and Primus Bermudamight as a result not be PFICs.

Holders of common shares areurged to consult with their tax advisors as to the tax consequences ofholding shares directly and indirectly (in the case of Primus Bermuda)of PFICs and the possible advisability of electing to have each ofPrimus Guaranty and Primus Bermuda treated as a "qualifiedelecting fund", or QEF, or of making a mark-to-marketelection with respect to Primus Guaranty.

If Primus Guaranty andPrimus Bermuda are treated as PFICs during your holding period and youhave not made a QEF election or a mark-to-market election (as describedbelow) with respect to each of Primus Guaranty and Primus Bermuda, youwill be subject to the following adverse tax consequences. Upon adisposition of common shares of Primus Guaranty (or the sale of PrimusBermuda shares by Primus Guaranty), including, under certaincircumstances, pursuant to an otherwise tax-free transaction, gainrecognized by you would be allocated ratably over your holding periodfor the common shares. The amounts allocated to the taxable year of thesale or other exchange would be taxed as ordinary income. The amountallocated to each other taxable year would be subject to tax at thehighest marginal federal income tax rate in effect for individuals orcorporations, as appropriate, and an interest charge would be imposedon the tax attributable to such allocated amounts. Further, anydistribution in respect of common shares of Primus Guaranty (or toPrimus Guaranty in respect of shares of Primus Bermuda) will be taxedas above if the amount of the distribution is more than 125% ofthe average distribution with respect to the common shares received byyou (or by Primus Guaranty in the case of a distribution in respect ofPrimus Bermuda shares) during the preceding three years or your holdingperiod, whichever is shorter. Distributions by a PFIC are not eligiblefor the reduced tax rate of 15% that applies to certaindividends paid to noncorporate United States shareholders.

IfPrimus Guaranty and Primus Bermuda are PFICs and you do not make a QEFelection or a mark-to-market election (as described below) at the timeyou purchase the common shares, the 

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corporations will continue to be treated asPFICs with respect to the common shares held directly or indirectly byyou, even if they subsequently cease to qualify as PFICs, unless anelection, described below, is made to "purge"the PFIC taint. A "purging" election woulditself accelerate PFIC tax treatment but would avoid PFIC tax treatmentfor subsequent years when Primus Guaranty and Primus Bermuda are notPFICs and for years in which a QEF election, as discussed below, is ineffect. Different methods of "purging" thePFIC taint are available depending on whether the corporation is a PFICat the time the election is made and certain other facts.

Underthe Internal Revenue Code of 1986, as amended, or the Code, a direct orindirect shareholder of a PFIC may elect to have the PFIC treated as aqualified electing fund with respect to such shareholder (a QEFelection). If during your holding period you have always had a QEFelection in effect for both Primus Guaranty and Primus Bermuda whilethey were PFICs, you will not be subject to the PFIC tax treatmentdescribed in the preceding paragraphs. Instead, you will be required toinclude in your income each year your pro rata share of their capitalgain and ordinary earnings for that year, and any excess obtained withrespect to the common shares by disposition is generally treated ascapital gain. For this purpose, a corporation owning an interest in anentity which is a partnership for United States federal income taxpurposes, such as Primus Bermuda owning an interest in PrimusFinancial, would be allocated the share of the capital gain andordinary earnings of the partnership attributable to the interest itowns. Thus, if you make a QEF election with respect to Primus Bermuda,as well as Primus Guaranty, you will be required to include a portionof the capital gain and ordinary income of Primus Financial in yourincome. As a result, you may be subject to current tax based on theincome of Primus Guaranty or Primus Bermuda without any distribution ofcash to enable such tax to be paid. If you have made a QEF election forboth Primus Guaranty and Primus Bermuda, you may elect to defer thepayment of the tax on such income items, subject to an interest charge,until the corresponding amounts are distributed, or until you disposeof your common shares.

As discussed in more detail below, wehave determined that the credit swaps sold by Primus Financial are besttreated as the sale of options for United States federal income taxpurposes. Accordingly, Primus Financial will recognize income or lossas a protection seller only upon default or expiration of the creditswaps. There is no definitive authority in support of the treatment byPrimus Financial of its credit swaps as options for United Statesfederal income tax purposes, and we do not intend to seek a ruling fromthe IRS on this point. In addition, the IRS has been studying thetreatment of derivative transactions generally, including credit swapsand has recently issued a notice requesting submissions from taxpayersregarding the manner in which they conduct their credit swap activitiesand indicating that the United States Department of the Treasury andthe IRS are contemplating issuing specific guidance in this area. Noassurance can be given as to whether or when such guidance may beissued, whether it would be applied retroactively or whether it will beadverse to Primus Financial. The notice describes numerous potentialalternative characterizations of credit swaps, including acharacterization consistent with the treatment adopted by PrimusFinancial and other characterizations that would have adverse taxconsequences for Primus Financial. If the IRS were to assertsuccessfully that the credit swaps sold by Primus Financial should betreated other than as the sale of options, the timing of the incomerecognized by Primus Financial could be accelerated, which wouldaccelerate the inclusion of taxable income by you if you make QEFelections. In addition, because the option treatment adopted by PrimusFinancial for the tax treatment of credit swaps differs from thetreatment used for financial accounting purposes, the amount of taxableincome that you would include in a particular year as a result of a QEFelection may differ significantly from, and in particular years may besignificantly greater than, the amount that you would have includedwere taxable income calculated in the manner used for financialaccounting purposes.

Primus Guaranty intends to comply, and tocause Primus Bermuda to comply, with all record-keeping, reporting andother requirements so that you may maintain a QEF election with respectto Primus Guaranty and Primus Bermuda. If you desire to make andmaintain a QEF election, you may contact us for the PFIC annualinformation statement, which may be used to complete your annual QEFelection filings. You will need to rely on the information provided byus in the annual information statement in preparing your income taxfilings.

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A QEF election is made on ashareholder-by-shareholder basis and can be revoked only with theconsent of the IRS. A QEF election is made by attaching a completed IRSForm 8621 (using the information provided in the PFIC annualinformation statement) to your timely filed United States federalincome tax return. Even if a QEF election is not made, you must file acompleted IRS Form 8621 every year.

Alternatively, if shares ofa PFIC are "regularly traded" on a"qualified exchange" (which includes certainUnited States exchanges and other exchanges designated by the UnitedStates Treasury Department), or marketable stock, a United Statesholder of such shares may make a mark-to-market election. In general, aclass of shares is treated as regularly traded for a calendar year ifit is traded, other than in de minimis amounts, for at least 15 daysduring each calendar year quarter. The common shares of Primus Guarantytrade on the NYSE, a "qualified exchange",and it is anticipated that they qualify as "regularlytraded" on that exchange for this purpose, although therecan be no assurance that they actually so qualify.

If you make avalid mark-to-market election with respect to Primus Guaranty, you willnot be subject to the PFIC rules described above with respect to PrimusGuaranty, and instead will include each year in ordinary income theexcess, if any, of the fair market value of its PFIC shares at the endof the taxable year over its adjusted basis in such shares. The excess,if any, of the adjusted basis over the fair market value at the end ofthe taxable year will be permitted as an ordinary loss (but only to theextent of the net amount previously included in income as a result ofthe mark-to-market election). If you make the election, your basis inyour PFIC shares will be adjusted to reflect any such income or lossamounts.

Even if the common shares of Primus Guaranty qualify as"marketable stock" for this purpose, thestock of Primus Bermuda, which is expected to be a PFIC, will not be"marketable stock" for these purposes. Thereis no authority on how a mark-to-market election for a corporationwhich is a PFIC affects that holders' treatment of a subsidiaryof that corporation which is also a PFIC. If you make a mark-to-marketelection with respect to Primus Guaranty, you may continue to besubject to PFIC tax treatment with respect to Primus Bermuda, in theabsence of a QEF election with respect to Primus Bermuda, and toadditional inclusions of taxable income, if such a QEF election ismade. You should consult your tax advisor as to the possibility ofmaking a QEF election with respect to your indirect ownership of theshares of Primus Bermuda, which shares will not qualify as"marketable stock".

You are urged toconsult with your tax advisors regarding the likely classification ofPrimus Guaranty and Primus Bermuda as PFICs and the advisability ofmaking QEF elections with respect to Primus Guaranty and PrimusBermuda.

Alternative Characterizations.    If PrimusGuaranty and Primus Bermuda were not PFICs, distributions with respectto the common shares would be treated as ordinary dividend income tothe extent of Primus Guaranty's current or accumulated earningsand profits as determined for United States federal income taxpurposes. Dividends paid by Primus Guaranty to United Statescorporations are not eligible for the dividends-received deduction anddividends paid on its common shares to noncorporate United Statesshareholders would be eligible for the reduced tax on dividends at amaximum rate of 15%, as our common shares are listed on the NYSEand therefore readily tradeable on an established securities market inthe United States for purposes of Section 1(h)(11) of the Code.Distributions in excess of Primus Guaranty's current andaccumulated earnings and profits would first be applied to reduce yourtax basis in the common shares, and any amounts distributed in excessof such tax basis would be treated as gain from the sale or exchange ofthe common shares.

If Primus Guaranty and Primus Bermuda werenot PFICs, you would, upon the sale or exchange of common shares,generally recognize gain or loss for federal income tax purposes equalto the excess of the amount realized upon such sale or exchange overyour federal income tax basis for such common shares. Such long-termcapital gain is currently generally subject to a reduced rate of UnitedStates federal income tax if recognized by noncorporate United Statesholders, which rate is currently a maximum of 15% for yearsprior to 2009. Limitations apply to the deduction of capitallosses.

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Non-United States Holders

Subject to certain exceptions, persons that are not United Statespersons will be subject to United States federal income tax on dividenddistributions with respect to, and gain realized from, the sale orexchange of common shares only if such dividends or gains areeffectively connected with the conduct of a trade or business withinthe United States.

Taxation of Primus Guaranty and ItsSubsidiaries

Bermuda Taxation

Primus Guaranty andPrimus Re.    Each of Primus Guaranty and Primus Re has receivedan assurance under the Exempted Undertakings Tax Protection Act 1966 ofBermuda, or the Tax Protection Act, to the effect that in the event ofany legislation imposing tax computed on profits or income, or computedon any capital asset, gain, or appreciation, or any tax in the natureof estate duty or inheritance tax being enacted in Bermuda, then theimposition of any such tax shall not be applicable to Primus Guarantyor Primus Re, or to any of their operations, or the shares, debentures,or other obligations of Primus Guaranty and Primus Re until March 28,2016. This assurance does not prevent the application of any such taxor duty to such persons who are ordinarily resident in Bermuda or theapplication of any tax payable in accordance with the provisions of theLand Tax Act 1967 of Bermuda or otherwise payable in relation to theproperty leased to Primus Guaranty or Primus Re. Primus Re is requiredto pay annual insurance license fees, and each of Primus Re and PrimusGuaranty is required to pay certain annual Bermuda government fees. Inaddition, all entities employing individuals in Bermuda are required topay a payroll tax to the Bermuda government. Currently, there is noBermuda withholding tax on dividends paid by Primus Guaranty or PrimusRe.

United States Taxation

Primus Guaranty, PrimusBermuda and Primus Financial.    Based on how PrimusGuaranty and Primus Bermuda operate and will continue to operate theirbusinesses, Primus Guaranty believes that Primus Guaranty and PrimusBermuda should not be treated as engaged in a trade or business withinthe United States. Primus Guaranty also believes that Primus Bermudashould not be treated as engaged in a United States trade or businessthrough its indirect ownership interest in Primus Financial. Inreaching this view, Primus Guaranty has concluded that, although thematter is not free from doubt and there is no governing authority onthe point, Primus Financial's activity of selling credit swaps,together with its other activities, are best viewed as transactions insecurities or commodities as an investor or trader (rather than adealer) for Primus Financial's own account in the United Statesunder Section 864(b)(2) of the Code, and thus Primus Financial (andPrimus Bermuda, as a non-United States partner in Primus Financial forUnited States federal income tax purposes) should not be viewed asengaged in a United States trade or business. In reaching thisconclusion, Primus Guaranty is relying on statements by the IRS thattaxpayers engaged in derivative transactions may take any reasonableposition pending the adoption of final regulations regarding thetreatment of derivative transactions for purposes of Section 864(b)(2)of the Code. These IRS statements do not have the force of Codeprovisions or adopted regulations and may be revoked or amendedretroactively, subject only to review for abuse of discretion. Becausethe determination of whether a foreign corporation is engaged in atrade or business in the United States is inherently factual and thereare no definitive standards for making such determination, and thetreatment in particular of credit swaps and Primus Financial'scurrent and anticipated activities is unsettled, there can be noassurance that the IRS will not contend successfully that PrimusGuaranty, Primus Bermuda or Primus Financial is engaged in a trade orbusiness in the United States.

If the IRS successfully assertsthat Primus Guaranty or Primus Bermuda (either directly or through itsinterest in Primus Financial) is engaged in a trade or business in theUnited States, it will be subject to United States federal income tax,as well as, potentially, the branch profits tax, on its net income thatis effectively connected with the conduct of the trade or business,unless the corporation is entitled to relief under an income taxtreaty. Such income tax would be imposed on effectively 

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connected net income, which is computed in amanner generally analogous to that applied to the net income of adomestic corporation. However, if a foreign corporation does not timelyfile a United States federal income tax return, even if its failure todo so is based upon a good faith determination that it was not engagedin a trade or business in the United States, it is not entitled todeductions and credits allocable to its effectively connected income.Moreover, penalties may be assessed for failure to file such taxreturns. Primus Guaranty and Primus Bermuda intend to file"protective" United States federal income taxreturns so that if they are held to be engaged in a trade or businessin the United States, they would be allowed to deduct expenses andutilize credits allocable to income determined to be effectivelyconnected with such trade or business and would not be subject to afailure to file penalty.

The maximum United States corporateincome tax rate currently is 35% for a corporation'seffectively connected net income. If Primus Financial is found to beengaged in a United States trade or business, it will be required toperform United States federal income tax withholding, at the rate of35%, in respect of Primus Bermuda's allocable share ofPrimus Financial's income that is effectively connected with suchUnited States trade or business under Section 1446 of the Code,regardless of whether distributions are actually made by PrimusFinancial to Primus Bermuda or Primus Group Holdings. In such acircumstance, Primus Bermuda will be entitled to credit any suchwithholding tax against its liability for United States federal incometax.

The United States branch profits tax rate currently is30%, subject to reduction by applicable tax treaties. The branchprofits tax, which is based on net income after subtracting the regularcorporate tax and making certain other adjustments, is imposed on theamount of net income deemed to have been withdrawn from the UnitedStates. If Primus Financial is found to be engaged in a United Statestrade or business, and as a result the United States branch profits taxapplies to Primus Bermuda, the branch profits tax may be imposed at arate of 30%.

As discussed above, we have determined thatthe credit swaps sold by Primus Financial are best treated as the saleof options for United States federal income tax purposes, such thatPrimus Financial will recognize income or loss as a protection selleronly upon default or expiration of the credit swaps. There is nodefinitive authority in support of the treatment by Primus Financial ofits credit swaps as options for United States federal income taxpurposes. We do not intend to seek a ruling from the IRS on this point.In addition, the IRS has been studying the treatment of derivativetransactions generally, including credit swaps and has recently issueda notice requesting submissions from taxpayers regarding the manner inwhich they conduct their credit swap activities and indicating that theUnited States Department of the Treasury and the IRS are contemplatingissuing specific guidance in this area. No assurance can be given as towhether or when such guidance may be issued, whether it would beapplied retroactively or whether it will be adverse to PrimusFinancial. The notice describes numerous potential alternativecharacterizations of credit swaps, including a characterizationconsistent with the treatment adopted by Primus Financial and othercharacterizations that would have adverse tax consequences for PrimusFinancial. If the IRS were to assert successfully that the credit swapssold by Primus Financial should be treated other than as an option, (i)the timing of the income recognized by Primus Financial could beaccelerated, (ii) the character of this income could be altered and(iii) Primus Bermuda, as a non-United States person, could be subjectto United States income or withholding tax at the rate of 30% onits FDAP income (discussed below). In addition, were these changes incharacter to apply and were Primus Bermuda (through its investment inPrimus Financial) found to be engaged in a United States trade orbusiness, Primus Bermuda's recognition of taxable income would beaccelerated.

A foreign corporation not engaged in a trade orbusiness in the United States is generally subject to United Statesincome tax at the rate of 30% on its "fixed ordeterminable annual or periodic gains, profits andincome", or FDAP income, derived from sources within theUnited States (for example, dividends and certain interest income).Thus, even if Primus Guaranty and Primus Bermuda are not engaged in atrade or business in the United States, they could be subject to the30% tax on certain FDAP income, depending upon the types ofinstruments in which they invest. Premium income from 

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credit swap sales does not constitute FDAPincome, assuming as discussed above that the credit swaps sold byPrimus Financial are treated as the sale of options for United Statesfederal income tax purposes.

The above analysis generallyassumes that Primus Financial is and continues to be a partnershipother than a publicly-traded partnership for United States federalincome tax purposes. Generally, a partnership with fewer than 100partners at all times is treated as a partnership that is not apublicly traded partnership. Because of restrictions on the ownershipcomposition of Primus Financial, we believe that Primus Financial isnot and will not become a publicly-traded partnership and thus will notbe required to pay United States federal income tax on its income.However, there can be no assurance that Primus Financial is not or willnot become a publicly-traded partnership, which could have a materiallyadverse effect on our financial condition and results of operations.Were Primus Financial to be a publicly-traded partnership for UnitedStates federal income tax purposes, it could be required to pay UnitedStates federal income tax on its income (without regard to whether itis engaged in a United States trade or business), instead of passingthrough its income and loss to its partners, and it will be required toperform United States federal income tax withholding, at the rate of30%, in respect of amounts paid to Primus Bermuda.

Primus Asset Management.    Primus Asset Management is aUnited States corporation which owns 100% of the shares ofPrimus Re and is owned by Primus Bermuda through Primus Group Holdings,a disregarded entity for United States federal income tax purposes.Primus Asset Management is expected to be subject to United Statesfederal income tax on a net basis on its income. At present theprincipal activity of Primus Asset Management is providing managementservices to Primus Guaranty and its subsidiaries, principally PrimusFinancial, under a services agreement. In 2004, Primus Asset Managemententered into agreements to act as a portfolio manager for thirdparties.

Primus Asset Management has reported on its UnitedStates federal income tax returns a net operating loss carryforward andother tax attributes reflecting various items of loss and deduction,including with respect to predecessor companies. Various restrictionsmay apply to these tax attributes, including under Section 382 of theCode, and no assurance can be given that the availability of some orall of these tax attributes will not be successfully challenged by theIRS.

Any dividends paid by Primus Asset Management to PrimusBermuda through Primus Group Holdings from its earnings or fromdistributions received from Primus Re, will be subject to United Statesfederal income tax withholding at a rate of 30%.

Primus Re.    Primus Re has recently commenced limitedoperations, and we have not yet determined the tax treatment thatPrimus Re will adopt for United States federal income tax purposes.Depending on the nature of Primus Re's operations, it may betreated as an insurance company, in which case it may elect underSection 953(d) of the Code to be treated as a United States corporationfor United States federal income tax purposes, or as engaged ininvestment activities, which could require the inclusion of taxableincome by its parent, Primus Asset Management, each year. In addition,if Primus Re is treated for United States federal income tax purposesas an insurance company and a non-United States person, United Statesinsurance excise tax could apply to premiums it receives with respectto its policies covering United States risks.

PersonalHolding Company Tax and Accumulated Earnings Tax.    A personalholding company tax is imposed at a current rate of 15% on theundistributed personal holding company income (subject to certainadjustments) of a personal holding company. The accumulated earningstax is imposed on corporations (including foreign corporations withdirect or indirect shareholders subject to United States tax) thataccumulate earnings in excess of the reasonably anticipated needs ofthe business, generally at a current rate of 15% on acorporation's excess accumulated earnings. These taxes only applyin certain circumstances, but, in any case, neither tax applies to acorporation that is a PFIC. Because Primus Guaranty and Primus Bermudalikely are and will continue to be PFICs, these taxes should not applyto them.

Backup Withholding.    Payment of dividendsand sales proceeds that are made within the United States or throughcertain U.S.-related financial intermediaries generally are subject tobackup 

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withholding unless you (i) are a corporationor come within certain other exempt categories and, when required,demonstrate this fact, or (ii) provide a taxpayer identificationnumber, certify as to no loss of exemption from backup withholding andotherwise comply with applicable requirements of the backup withholdingrules. The backup withholding tax is not an additional tax and may becredited against your regular United States federal income taxliability.

Item 2.    Properties

Primus Financialoccupies approximately 12,000 square feet in New York, New York under alease that expires in 2012. We believe our space is adequate for ourcurrent needs and that suitable additional or substitute space will beavailable to accommodate foreseeable expansion of our operations. We donot lease or own real property in Bermuda.

Item 3.    LegalProceedings

In the ordinary course of operating our business,we may encounter a significant risk of litigation from time to time.However, we are not party to nor currently aware of any materialpending or threatened litigation.

Item 4.    Submission ofMatters to a Vote of Security Holders

We did not submit anymatters to a vote of security holders during the fourth quarter of2004.

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Part II.

Item 5.    Market for Registrant's Common Equity andRelated Stockholder Matters

Use of Proceeds

Theeffective date of our registration statement (Registration No.333-114818) filed on Form S-1 relating to our initial public offering,or IPO, of common shares was September 29, 2004. In our IPO, weregistered and sold 9,143,493 common shares, par value $.08 per share,at a price of $13.50 per share and an aggregate public offering priceof $123,437,156 for the account of the company. In addition, there wereregistered and sold, for the account of certain selling shareholdersidentified in the registration statement, 1,201,335 common shares at aprice of $13.50 per share and an aggregate public offering price of$16,218,022. Our IPO was managed and underwritten by Lehman BrothersInc., Morgan Stanley & Co. Incorporated, Credit Suisse First BostonLLC, UBS Investment Bank, William Blair & Company L.L.C. and KeefeBruyette & Woods, Inc. The offering closed on October 5, 2004.Proceeds to us from our IPO, after deduction of the underwritingdiscounts and commissions payable by the company of approximately $8.64million and offering costs payable by the company of $4.1 million,totaled approximately $110.7 million. None of the expenses incurred andpaid by us in our IPO were direct or indirect payments to ourdirectors, officers, general partners or their associates, to personsowning 10% or more of any class of our equity securities or toour affiliates, except that our shareholders which sold shares in theIPO did not pay any portion of our out-of-pocket offering costs. Of the$110.7 million raised for the account of the company, approximately$60.0 million has been used to provide additional working capital toour affiliate, Primus Financial, in order to increase its capacity tosell additional credit swaps. Primus Financial has invested thisadditional capital in accordance with its operating guidelines inUnited States government agencies and money market instruments. Wecontinue to expect that the remainder of the proceeds from the offeringwill be used as working capital and for general corporate purposes,including providing additional capital to Primus Financial to enable itto further expand its credit swap business and to pursue opportunitiesin complementary businesses, such as asset management for third partiesand selling credit swaps referencing a broader range of obligations,although specific amounts have not been allocated for these additionalpurposes. Pending such uses, the balance of $50.7 million has beeninvested by the company in United States government agencies and moneymarket instruments. The occurrence of unforeseen events, opportunitiesor changed business conditions, however, could cause us to use the netproceeds of our IPO in a manner other than as described above.

Market Information

Our common shares trades on the NYSEunder the symbol "PRS." The following tablesets forth, for the indicated periods, the high and low sales pricesper common share in U.S. dollars, as reported on theNYSE:

|                            |  |      |       |        |  |   |       |        |  |  |
|----------------------------|--|------|-------|--------|--|---|-------|--------|--|--|
| Yearended December 31,2004 |  | High |       | Low    |
| FourthQuarter              |  | $    | 17.01 |   |  | $ | 12.24 |   |
| September30, 2004*         |  | $    | 13.60 |   |  | $ | 13.50 |   |
|                            |

|  |                                                         |
|--|---------------------------------------------------------|
|  | * Ourcommon shares began trading on September 30, 2004. |

Shareholder Information

As of March 15, 2005, 42,783,939shares of our common stock were listed and outstanding, held byapproximately 20 shareholders of record.

Dividend andDistribution Information

We do not intend to pay dividends onour common shares for the foreseeable future. We plan to retain ourearnings for use in the operation of our business and to fund futuregrowth. Any determination to pay cash dividends in the future will beat the discretion of the Board of Directors 

29

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and will be dependent upon lender approval aswell as our results of operations, financial condition, contractualrestrictions and other factors deemed relevant by the Board ofDirectors.

Recent Sale of Unregistered Securities

Primus Financial issued $75.0 million of subordinated deferrableinterest notes on July 23, 2004. Lehman Brothers Inc. acted as the soleinitial purchaser in connection with such offering and was paid a feeof $937,500 in consideration for providing such services. This issuancewas deemed to be exempt from registration under the Securities Act byvirtue of Section 4(2) thereof.

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Item 6.    Selected HistoricalConsolidated Financial Data

The following tables present ourhistorical financial and operating data as of the dates or for theperiods indicated. We derived the data for years ended December 31,2004, 2003, 2002 and 2001 from our consolidated financial statements,which have been prepared in accordance with U.S. generally acceptedaccounting principles ("U.S. GAAP") andaudited by Ernst & Young LLP. Our historical financial statementsfor the year ended December 31, 2000 have not been audited, but, in theopinion of management, contain all adjustments, consisting only ofnormal recurring accruals, necessary for a fair presentation of ourresults of operations for the year ended December 31, 2000 andfinancial position as of December 31, 2000. Until March 2002, we werein a development stage. We were capitalized on March 14, 2002 and beganto sell credit swaps in June 2002. The following information should beread in conjunction with "Management's Discussionand Analysis of Financial Condition and Results ofOperations" and our financial statements and the relatednotes appearing elsewhere in this Annual Report on Form 10-K.

|                                                                                     |  |                      |        |         |  |        |         |         |  |        |         |         |  |        |         |         |  |        |         |         |  |  |
|-------------------------------------------------------------------------------------|--|----------------------|--------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                                                |  | YearEnded December31 |
|                                                                                |  | 2004                 |        | 2003    |  | 2002   |         | 2001    |  | 2000   |
| (amountsin thousands, except per sharedata)                                         |  |                 |   |    |  |   |    |    |  |   |    |    |  |   |    |    |  |   |    |    |
| **ConsolidatedStatement ofOperations:**                                             |  |                 |   |    |  |   |    |    |  |   |    |    |  |   |    |    |  |   |    |    |
| **Revenues:**                                                                       |  |                 |   |    |  |   |    |    |  |   |    |    |  |   |    |    |  |
| Netcredit swaprevenue                                                               |  | $                    | 47,729 |    |  | $      | 103,326 |    |  | $      | 14,761  |    |  | $      | — |    |  | $      | — |    |
| Premiumsearned on financialguarantees                                               |  |                 | 395    |    |  |   | — |    |  |   | — |    |  |   | — |    |  |   | — |    |
| Interestincomeearned                                                                |  |                 | 4,850  |    |  |   | 2,617   |    |  |   | 1,610   |    |  |   | 2       |    |  |   | 5       |    |
| Foreigncurrencyrevaluation                                                          |  |                 | 726    |    |  |   | — |    |  |   | — |    |  |   | — |    |  |   | — |    |
| Otherincome                                                                         |  |                 | 55     |    |  |   | 107     |    |  |   | 12      |    |  |   | — |    |  |   | — |    |
| Totalrevenues                                                                       |  | $                    | 53,755 |    |  | $      | 106,050 |    |  | $      | 16,383  |    |  | $      | 2       |    |  | $      | 5       |    |
| **Expenses:**                                                                       |  |                 |   |    |  |   |    |    |  |   |    |    |  |   |    |    |  |   |    |    |
| Employeecompensation                                                                |  | $                    | 17,801 |    |  | $      | 11,701  |    |  | $      | 8,156   |    |  | $      | 1,020   |    |  | $      | 768     |    |
| Otherexpenses                                                                       |  |                 | 10,085 |    |  |   | 14,196  |    |  |   | 11,042  |    |  |   | 1,769   |    |  |   | 2,341   |    |
| **Totalexpenses**                                                                   |  | $                    | 27,886 |    |  | $      | 25,897  |    |  | $      | 19,198  |    |  | $      | 2,789   |    |  | $      | 3,109   |    |
| **Distributionson preferred securities ofsubsidiary**                               |  | $                    | (2,138 | )  |  | $      | (1,854  | )  |  | $      | — |    |  | $      | — |    |  | $      | — |    |
| **Income(loss) before benefit (provision) for income    taxes** |  | $                    | 23,731 |    |  | $      | 78,299  |    |  | $      | (2,815  | )  |  | $      | (2,787  | )  |  | $      | (3,104  | )  |
| Benefit(provision) for incometax                                                    |  |                 | (46    | )  |  |   | 172     |    |  |   | (254    | )  |  |   | — |    |  |   | — |    |
| **Netincome(loss)**                                                                 |  | $                    | 23,685 |    |  | $      | 78,471  |    |  | $      | (3,069  | )  |  | $      | (2,787  | )  |  | $      | (3,104  | )  |
| Basicearnings (loss) pershare.                                                      |  | $                    | 1.44   |    |  | $      | 31.18   |    |  | $      | (1.22   | )  |  | $      | (1.12   | )  |  | $      | (258.66 | )  |
| Dilutedearnings (loss) pershare                                                     |  | $                    | 0.59   |    |  | $      | 2.33    |    |  | $      | (1.22   | )  |  | $      | (1.12   | )  |  | $      | (258.66 | )  |
| Weightedaverage number of common shares    outstanding:         |  |                 |   |    |  |   |    |    |  |   |    |    |  |   |    |    |  |   |    |    |
| Basic                                                                               |  |                 | 16,486 |    |  |   | 2,517   |    |  |   | 2,510   |    |  |   | 2,479   |    |  |   | 12      |    |
| Diluted                                                                             |  |                 | 40,256 |    |  |   | 33,737  |    |  |   | 2,510   |    |  |   | 2,479   |    |  |   | 12      |    |
|                                                                                     |

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|                                                                                                         |  |                 |         |        |  |        |         |        |  |        |         |         |  |        |         |         |  |        |         |         |  |  |
|---------------------------------------------------------------------------------------------------------|--|-----------------|---------|--------|--|--------|---------|--------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                                                                    |  | Asof December31 |
|                                                                                                    |  | 2004            |         | 2003   |  | 2002   |         | 2001   |  | 2000   |
| **BalanceSheetData:**                                                                                   |  |            |    |   |  |   |    |   |  |   |    |    |  |   |    |    |  |   |    |    |
| **Assets**                                                                                              |  |            |    |   |  |   |    |   |  |   |    |    |  |   |    |    |  |   |    |    |
| Cashand cashequivalents                                                                                 |  | $               | 320,989 |   |  | $      | 257,967 |   |  | $      | 220,975 |    |  | $      | 136     |    |  | $      | 138     |    |
| Short-terminvestments                                                                                   |  |            | 161,101 |   |  |   | 3,968   |   |  |   | — |    |  |   | — |    |  |   | — |    |
| Unrealizedgain on credit swaps, at fairvalue                                                            |  |            | 46,517  |   |  |   | 46,594  |   |  |   | 5,705   |    |  |   | — |    |  |   | — |    |
| Fixedassets and capitalizedsoftware                                                                     |  |            | 6,097   |   |  |   | 7,124   |   |  |   | 12,322  |    |  |   | — |    |  |   | — |    |
| Otherassets                                                                                             |  |            | 8,014   |   |  |   | 5,776   |   |  |   | 5,859   |    |  |   | — |    |  |   | — |    |
| **Totalassets**                                                                                         |  | $               | 542,718 |   |  | $      | 321,429 |   |  | $      | 244,861 |    |  | $      | 136     |    |  | $      | 138     |    |
| **Liabilitiesand shareholders'equity**                                                                  |  |            |    |   |  |   |    |   |  |   |    |    |  |   |    |    |  |   |    |    |
| Unrealizedloss on credit swaps, at fairvalue                                                            |  | $               | 259     |   |  | $      | 68      |   |  | $      | 5,918   |    |  | $      | — |    |  | $      | — |    |
| Long-termdebt                                                                                           |  |            | 75,000  |   |  |   | — |   |  |   | — |    |  |   | — |    |  |   | — |    |
| Otherliabilities                                                                                        |  |            | 7,941   |   |  |   | 8,002   |   |  |   | 5,191   |    |  |   | 6,981   |    |  |   | 4,328   |    |
| **Totalliabilities**                                                                                    |  | $               | 83,200  |   |  | $      | 8,070   |   |  | $      | 11,109  |    |  | $      | 6,981   |    |  | $      | 4,328   |    |
| **Preferredsecurities ofsubsidiary**                                                                    |  | $               | 98,521  |   |  | $      | 98,521  |   |  | $      | 98,521  |    |  | $      | — |    |  | $      | — |    |
| **Shareholders'equity**                                                                                 |  |            |    |   |  |   |    |   |  |   |    |    |  |   |    |    |  |   |    |    |
| Commonstock                                                                                             |  | $               | 3,535   |   |  | $      | 230     |   |  | $      | 208     |    |  | $      | 240     |    |  | $      | 12      |    |
| Additionalpaid-in-capital                                                                               |  |            | 264,860 |   |  |   | 1,325   |   |  |   | 211     |    |  |   | — |    |  |   | 108     |    |
| Convertiblepreferredstock                                                                               |  |            | — |   |  |   | 143,908 |   |  |   | 143,908 |    |  |   | 12      |    |  |   | — |    |
| Warrants                                                                                                |  |            | 612     |   |  |   | 1,070   |   |  |   | 1,070   |    |  |   | — |    |  |   | — |    |
| Retainedearnings (accumulated deficit)                                                                  |  |            | 91,990  |   |  |   | 68,305  |   |  |   | (10,166 | )  |  |   | (7,097  | )  |  |   | (4,310  | )  |
| **Totalshareholders' equity(deficit)**                                                                  |  | $               | 360,997 |   |  | $      | 214,838 |   |  | $      | 135,231 |    |  | $      | (6,845  | )  |  | $      | (4,190  | )  |
| **Totalliabilities, preferred securities of subsidiary     andshareholders'equity** |  | $               | 542,718 |   |  | $      | 321,429 |   |  | $      | 244,861 |    |  | $      | 136     |    |  | $      | 138     |    |
| **PerShareData:**                                                                                       |  |            |    |   |  |   |    |   |  |   |    |    |  |   |    |    |  |   |    |    |
| Bookvalue pershare(1)                                                                                   |  | $               | 8.44    |   |  | $      | 82.63   |   |  | $      | 51.95   |    |  | $      | (2.28   | )  |  | $      | (349.17 | )  |
| Dilutedbook value pershare(2)                                                                           |  | $               | 8.03    |   |  | $      | 6.41    |   |  | $      | 4.23    |    |  | $      | (2.28   | )  |  | $      | (349.17 | )  |
|                                                                                                         |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                                                                               |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Bookvalue per share is based on total shareholders' equity divided bybasic common shares outstanding. For years prior to 2001, the onlyshares issued were 12,000 common shares, par value $1.00 per share,issued to the founder. This total has not been adjusted for the reverseshare split. |

|     |                                                                                                                                                                               |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Diluted book value per shareis based on total shareholders' equity plus the assumed exerciseof all dilutive options and warrants divided by diluted common sharesoutstanding. |

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Item7.    Management's Discussion and Analysis of FinancialCondition and Results of Operations

The following is adiscussion and analysis of our financial condition and results ofoperations. This discussion should be read in conjunction with ourconsolidated financial statements and accompanying notes, which appearelsewhere in this Annual Report on Form 10-K. It containsforward-looking statements that involve risks and uncertainties. Ouractual results could differ materially from those anticipated in theseforward-looking statements as a result of various factors, includingthose discussed below and elsewhere in this Annual Report on Form 10-K,particularly under the headings "RiskFactors" and "Cautionary Note RegardingForward-Looking Statements."

BusinessOverview

We, through our principal operating subsidiary, PrimusFinancial, are primarily engaged in selling credit protection againstinvestment grade credit obligations of corporate and sovereignentities. In exchange for a fixed quarterly premium, if a bankruptcy,failure to pay or restructuring (each, a "CreditEvent") occurs with respect to an Reference Entity uponwhich Primus Financial has sold credit protection, Primus Financialagrees to pay the notional amount of the credit swap contract to itsCounterparty in exchange for delivery of a senior unsecured creditobligation of that Reference Entity. We seek to minimize the riskinherent in our credit swap portfolio by maintaining a high quality,highly diversified credit swap portfolio across Reference Entities,industries and countries.

Primus Financial has the highestcounterparty credit ratings offered by S&P (AAA) and Moody's(Aaa) and is managed by an experienced team of professionals who haveexpertise in credit analysis, investing, risk management and marketanalysis.

Primus Asset Management manages the credit swapportfolios of Primus Financial and third parties. For such services,Primus Asset Management receives a management fee.

Primus Reoperates as a financial guaranty insurance company, and generatesrevenue by charging a higher insurance premium for protection sold thanthe premium it pays for the offsetting protection itpurchases.

Credit Swap Revenues

We record revenues or losses from our credit swaps as net creditswap revenue in our statement of operations. This item comprises thepremiums earned and premium expense on credit swaps, gains or lossesrealized as a result of the termination of credit swaps and changes inthe fair value of our credit swaps. Our experience is that considerablefluctuation may occur in the fair values of credit swaps from period toperiod and, as a consequence, the reader of our financial statementsshould not infer future results from historical net credit swaprevenues or losses.

We receive premium income from the creditswaps we sell. In general, premiums are received quarterly in arrearsand are accrued daily into income. In accordance with U.S. GAAP, wecarry our credit swaps on our balance sheet at their fair value.Changes in the fair value of our credit swap portfolio are included asa component of net credit swap revenue (loss) in our consolidatedincome statement. If a credit swap has an increase in fair value duringa period, the increase will add to our net credit swap revenues forthat period. Conversely, if a credit swap has a decline in fair valueduring the period, the decline will subtract from our net credit swaprevenues for that period. Changes in the fair value of our credit swapportfolio are a function of the notional amount and composition of theportfolio and prevailing market credit swap premiums for comparablecredit swaps. In general, the fair values of individual credit swapsare aggregated by counterparty for presentation in our statement ofcondition. If the aggregate total of fair values for a counterparty isa net gain, the total is recorded as a component of unrealized gains oncredit swaps, at fair value in our statement of condition. If theaggregate total of fair values for a counterparty is a net loss, thetotal is recorded as a component of unrealized losses on credit swaps,at fair value in our statement of condition. Aggregation bycounterparty is applied where an executed ISDA master agreement is inplace with the counterparty. In instances where we do not yet have anexecuted ISDA master agreement with the counterparty, the fair valuesof individual swap transactions are recorded as components ofunrealized gains or losses on 

33

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credit swaps, at fair value, dependent uponwhether the individual contract was at a gain or a loss. As of December31, 2004, we had not sold credit swaps to any counterparties with whomwe had not yet executed ISDA master agreements.

As a generalrule, when we sell credit default protection, it is our intention tomaintain the transaction until maturity. However, there are two sets ofcircumstances in which we could elect to terminate transactions priorto maturity, and we monitor our portfolio on a continuing basis toassess whether those circumstances are present.

First, wheneverwe receive new information suggesting that the credit quality of theunderlying risk has deteriorated to a material degree, we consider thepossibility of terminating the transaction, usually at a loss, to avoidthe larger loss that could result if the credit swap were to remain inplace until a credit event occurs. The principal factor that governsour decision regarding termination in these circumstances is whether webelieve that the underlying risk has become substantially greater thanthe level of risk we would choose to assume in entering into a new saleof credit default protection. As of December 31, 2004, we haveterminated less than 1% of the notional amount of credit swapsunder which we sold credit default protection due to creditconsiderations.

Second, we may also elect to terminate atransaction in order to realize a gain. In making a decision toterminate a transaction for this purpose, we consider a number ofdifferent factors, including the absolute amount of the unrealized gainwe could realize, the likelihood of additional gains arising from theposition, our view as to whether the capital dedicated to the positioncould be profitably reallocated to other opportunities over aforeseeable horizon, the total size of our portfolio in relation to ourcapital and the total size of our swap positions and exposures with aparticular counterparty. We refer to terminations effected under thesecircumstances as "resizing" or"rebalancing". The majority of our resizingoccurred during the second and third quarters of 2003, when marketcredit swap premium levels had dropped dramatically from their historic2002 highs. As of December 31, 2004, we have terminated less than10% of credit swaps under which we sold credit defaultprotection based on resizing or rebalancing considerations.

Wemay terminate a credit swap in any one of two ways. We may negotiate anagreed termination through the original counterparty (an unwind). Wemay negotiate an assignment and novation of our rights and obligationsunder the credit swap to a third party (an assignment). As analternative to terminating a transaction, we may enter into an equaland opposite transaction with a third party under which we purchasecredit default protection on terms that match the terms of the originaltransaction (an offset). In this last case, both sides of the positionmay subsequently be unwound or assigned.

In the event of anunwind or assignment, we pay or receive a cash settlement negotiatedwith the counterparty or assignee, based on the fair value of thecredit swap contract and the accrued premium on the swap contract atthe time of negotiation. The amounts we pay or receive are recorded asa realization of fair value and as a realization of accrued premiums inthe period in which the termination occurs.

When we purchasecredit protection as short-term investments, we incur the cost ofpaying premiums until we terminate the purchased protection. Weundertake these transactions in the expectation that the market creditswap premium level for the Reference Entity will rise subsequent to ourpurchase of protection, but any gains upon termination may not sufficeto offset the premium expense we have incurred while holding thepurchased protection. Indeed, the market credit swap premium level forthe Reference Entity may fall and we may incur termination losses aswell as premium expenses as a result. The fair value of our creditswaps purchased will be affected by market credit swap premiumlevels.

Expenses

Our expenses are primarily employeecompensation and other administrative expenses, including rent for ourpremises, professional fees and depreciation of our software andfixtures. Employee compensation expense includes salaries and benefits,cash bonuses and stock-based compensation.

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Distributions on Preferred Securities andDebt Securities

Primus Financial has issued Floating RateCumulative Preferred Stock, or PFP Cumulative Preferred Stock, that payperiodic distributions. The cost of these distributions is included inour income statement as distributions on preferred securities of asubsidiary. Further details of the nature and cost of these securitiesis included in our discussion of liquidity and capital resources.Primus Financial completed the issuance of $75.0 million ofsubordinated deferrable interest notes on July 23, 2004, the intereston which is recorded as interest expense in our financialstatements.

Income Taxes

Primus Guaranty, PrimusBermuda and Primus Financial are not expected to be engaged in theactive conduct of a trade or business in the United States and as aresult are not expected to be subject to United States federal, stateor local income tax. Primus Asset Management is a United Statesdomiciled corporation and is subject to United States federal, stateand local income tax on its income, including on fees received fromPrimus Financial. Primus Re may be subject to United States federal,state or local income tax, or Primus Asset Management may be requiredto include all or part of Primus Re's income in calculating itsliability for United States federal, state or local income tax,depending on the manner in which Primus Re conducts its business andthe tax elections it makes. The maximum combined rate of United Statescorporate federal, state and local income tax that could apply toPrimus Financial or Primus Bermuda, were they found to be engaged in aUnited States business in New York City and subject to income tax, isapproximately 46% (not including United States branch profitstax that would be imposed on Primus Bermuda were Primus Financialdeemed to be making distributions to Primus Bermuda). For United Statesfederal income tax purposes, Primus Guaranty and Primus Bermuda arelikely to be treated as PFICs.

Critical AccountingPolicies

Valuation of Credit Swaps

From the inceptionof our business, we have applied Statement of Financial AccountingStandards, or SFAS, 133, "Accounting for DerivativeInstruments and Hedging Activities," which establishedaccounting and reporting standards for derivative instruments. SFAS 133requires recognition of all credit swaps on the balance sheet at fairvalue. The market credit swap premium levels used to determine fairvalue generally take into account the expectation of such events.

The fair value of the credit swaps depends on a number of factors,primarily the market level of credit swap premiums associated withindividual Reference Entities and interest rates. Credit swaps arevalued using market-standard pricing models which calculate the netpresent value of differences between future premiums on currentlyquoted market credit swaps and the contractual future credit swappremiums on contracts we have undertaken. Our pricing model has beeninternally developed but is benchmarked against a market-standardmodel. Generally, our model uses quoted market credit swap premium datathat we purchase from an independent pricing service, on individualReference Entities. This service takes pricing information from anumber of prominent dealers and brokers in the credit swap marketacross a range of standard maturities and restructuring terms, andcreates average market credit swap premium quotes on specific ReferenceEntities.

We believe there are a variety of factors that mayinfluence market credit swap premium levels. The principal factor isthe market's view of the probability that a Reference Entity willdefault over the multi-year horizon typical for a credit swap contract.Those views in turn are influenced by the state of the economy, theoutlook for corporate financial health in general as well as theoutlook for particular industries and companies. Additional factorsinclude the magnitude of debt outstanding and debt paying capacitywithin those same industries and companies. One factor specific to thecredit swap market is the capacity of credit swap market participantsto sell credit swaps. If, for example, commercial banks are activelybuying protection to manage their regulatory capital, this will tend,other factors being equal, to absorb the capacity of protection sellersand cause an increase in market credit swap premiums. Conversely,creation of special purpose vehicles that sell protection create

35

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additional protection seller capacity and,absent additional demand, can cause a decrease in market premiums.Absent rapid and steep changes, interest rates have, at most, a limitedeffect on market credit swap premium levels.

For much of 2004,market credit swap premium levels were generally higher than thoseprevailing at December 31, 2003. The premium levels during this periodenabled us to sell swaps at attractive levels and we expanded ourportfolio accordingly. However, from August we observed generaldeclines in market premium levels, although we noted increases inmarket premiums in certain industry sectors. During the latter part ofthe year, we were still able to identify attractive opportunities, butwe limited the pace at which we grew the overall portfolio.

Financial Guarantees

We have undertaken a limited amount offinancial guarantee business through our subsidiary, Primus Re.Financial guarantees are insurance contracts that contingently requirethe guarantor to make payments to the guaranteed party. Primus Redesigns its guarantee contracts to qualify as non-derivatives inaccordance with the scope exception under paragraph 10d of SFAS 133, asamended by SFAS No. 149, "Amendment of Statement 133 onDerivative Instruments and Hedging Activities". We accountfor our financial guarantee contracts in accordance with SFAS No. 60,"Accounting and Reporting by InsuranceEnterprises". This requires that premiums are deferred andrecognized over the life of the contract and that losses are recordedin the period that they occur based on an estimate of the ultimate costof losses incurred. Policy acquisition costs include only thoseexpenses that relate primarily to, and vary with, premium production.No policy acquisition costs have been deferred by us as of December 31,2004, as any such amounts have been immaterial. As of December 31,2004, only three contracts had been written.

We do not activelyoffer financial guarantee insurance. Rather, it is an alternative wehave available when a counterparty requests an insurance contractinstead of a credit swap. Generally, a counterparty's choice of afinancial guarantee insurance contract versus a credit swap isdetermined by economic terms available in the marketplace as well asregulatory and accounting considerations. Also, the purchaser of aninsurance contract cannot submit a claim for payment unless it has aninsurable loss, whereas the purchaser of a credit swap need not haveactual exposure to the underlying risk.

Internal Use SoftwareCosts and Formation Expenses

During our development stage(through March 13, 2002), we were developing our proprietarytechnology. The primary applications developed were (1) capital modelsto support Primus Financial's AAA/Aaa counterparty ratings and(2) a transactional platform to control our credit swap activities,ranging from trade administration to support for financial accountingand reporting.

The software and related costs of developing thecapital model and control platform of approximately $12.4 million werecapitalized in accordance with AICPA Statement of Position (SOP) 98-1,"Accounting for the Costs of Computer SoftwareDeveloped or Obtained for Internal Use," as ofDecember 31, 2003. During 2004, an additional $541 thousand of softwareand related costs were capitalized. These costs are being amortizedover five years on a straight-line basis. Capitalized costs arereviewed periodically for impairment.

Stock-Based EmployeeCompensation Plans

Prior to 2003, we followed AccountingPrinciples Board, or APB, No. 25, "Accounting for StockIssued to Employees". In 2003, we adopted the fair valueapproach on a prospective basis for recording stock-based employeecompensation in accordance with the fair value method prescribed inSFAS 123, "Accounting for Stock-BasedCompensation", as amended by SFAS 148,"Accounting for Stock-Based Compensation—Transitionand Disclosure". Under these rules, compensation expenseis recognized based on the fair value of stock options, restrictedshares and restricted share units at the time of an award, adjusted andamortized over the related vesting period. The fair value of the stock

36

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options granted is determined through the useof a market-standard option-pricing model, which requires judgment asto appropriate volatility and interest rate factors. Prior to our IPOon September 30, 2004, in the absence of a public market for our commonshares, management and the board of directors estimated the marketvalue of our common shares for all options, restricted share units andshare issuances based on valuation opinions from independent valuationconsultants. After the IPO, the fair value used is the current marketvalue of our common shares at the grant date.

Results ofOperations

Overview

During 2004 we expanded ourportfolio of credit swaps outstanding by approximately 68% from2003. We also commenced managing pools of credit swaps on behalf ofthird parties. In addition, we listed on the NYSE and issued $75.0million of AAA rated long-term debt from Primus Financial. We believethat establishing ourselves as a public company and obtainingadditional capital from the proceeds of our IPO provide us withadditional opportunities to expand and diversify our operations in therapidly growing credit swap market.

For much of 2004, marketcredit swap premium levels were generally higher than those prevailingat December 31, 2003. The premium levels during this period enabled usto sell credit swaps at attractive levels and we expanded our portfolioaccordingly. However, from August market premium levels generallydeclined, although we noted increases in market premiums in certainindustry sectors. During the latter part of the year, we were stillable to identify some attractive opportunities, but we limited the paceat which we grew the overall portfolio. The movement in market premiumsduring the year was reflected in the fair value of the sold swapportfolio. The increase in market premiums in the early part of theyear led to a decline in the fair value of the portfolio; this wasreversed in the latter part of the year as market premiums fell and thevalue of the portfolio increased to approximately the same level as thebeginning of the year. At December 31, 2004, Primus Financial had $10.5billion (in notional amount) of credit swaps sold outstanding,excluding transactions with affiliates, with a weighted averageremaining life of 2.9 years.

We started selling Euro-denominatedcredit swaps in February 2003 and by December 31, 2004 Euro-denominatedcredit swaps comprised 29.3% of the notional amount of ourcredit swaps sold portfolio. The Euro has appreciated in value againstthe U.S. dollar during 2004, and this appreciation resulted in a netgain of $726 thousand for the year ended December 31, 2004, and isincluded in our statement of operations as foreign currencyrevaluation. For the year ended December 31, 2003, the foreign currencyrevaluation was not significant and is included in net credit swaprevenue in our statement of operations.

We have a smallportfolio of credit swaps whereby we purchase protection on selectedReference Entities as short-term investments. We purchase protection atwhat we then believe to be relatively low credit swap premium levelswith the expectation that the credit swap premium levels on theseReference Entities will rise. If the premium levels rise, we will beable to terminate the credit swaps at a gain. At December 31, 2004 wehad purchased credit swaps as short-term investments on a notionalamount of $468.2 million. In general, the decline in market premiumsduring the latter part of 2004 led to a decline in the fair value ofthe portfolio of credit swaps purchased.

We started our assetmanagement business in the third quarter of 2004, managing pools ofcredit swaps on behalf of third parties. We receive fee income for thisactivity. Generally, the fee structure is an ongoing fee prorated overthe life of the transaction, which is typically five years,supplemented by contingent success fees at the end of the transactionpayable only if certain performance metrics have been met.

YearEnded December 31, 2004 Compared with Year Ended December 31, 2003

We had net income of $23.6 million and $78.5 million for the yearsended December 31, 2004 and 2003, respectively. The decrease in netincome in 2004 was primarily driven by the lower unrealized gains inthe value of the credit swap portfolio, coupled with increased expensesand unrealized losses in our portfolio of credit swaps purchased forshort term appreciation.

37

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Net Credit Swap Revenue

Netcredit swap revenue was $47.7  million and $103.3  millionfor the years ended December 31, 2004 and 2003, respectively. Netcredit swap revenue includes:

|              |                     |
|--------------|---------------------|
| •  | Netpremiums earned; |

|              |                                                 |
|--------------|-------------------------------------------------|
| •  | Net realized gains(losses) on credit swaps; and |

|              |                                               |
|--------------|-----------------------------------------------|
| •  | Netunrealized gains (losses) on credit swaps. |

The table below showsthe component parts of net credit swap revenue for the years endedDecember 31, 2004 and2003.

|                                             |
|---------------------------------------------|
|                                             |  |  |  |  |  |  |  |  |  |  |
| ($in thousands)                             |  | Years endedDecember31, |
|                                        |  | 2004 |  | 2003 |
| Netpremiums earned                          |  | $ | 42,475 |   |  | $ | 38,958 |   |
| Netrealized gains on creditswaps            |  |   | 5,522 |   |  |   | 17,629 |   |
| Net unrealizedgains (losses) on creditswaps |  |   | (268 | )  |  |   | 46,739 |   |
| TotalNet Credit SwapRevenue                 |  | $ | 47,729 |   |  | $ | 103,326 |   |
|                                             |

NetPremiums Earned

Net premiums earned were $42.5 million and$39.0 million for the years ended December 31, 2004 and 2003,respectively. Net premiums earned include:

|              |                                      |
|--------------|--------------------------------------|
| •  | Premium income on credit swaps sold; |

|              |                                                                         |
|--------------|-------------------------------------------------------------------------|
| •  | Premium expense on credit swaps purchasedas short-term investments; and |

|              |                                                                                             |
|--------------|---------------------------------------------------------------------------------------------|
| •  | Premiumexpense on credit swaps purchased to offset credit risk on certaincredit swaps sold. |

The increase in net premiums earned wasprimarily driven by the increase in the portfolio of credit swaps soldin 2004 as compared to 2003, slightly offset by an increase in thepremiums paid for credit swaps purchased for short-term investmentpurposes in 2004. The table below shows the component parts of netpremiums earned for the years ended December 31, 2004 and 2003.

|                                                                                    |
|------------------------------------------------------------------------------------|
|                                                                                    |  |  |  |  |  |  |  |  |  |  |
| ($in thousands)                                                                    |  | Years endedDecember31, |
|                                                                               |  | 2004 |  | 2003 |
| Premiumincome on credit swapssold                                                  |  | $ | 43,494 |   |  | $ | 39,112 |   |
| Premium expenseon credit swaps purchased as short-terminvestments                  |  |   | (927 | )  |  |   | (19 | )  |
| Premiumexpense on credit swaps purchased to offset credit risk on certainswapssold |  |   | (92 | )  |  |   | (135 | )  |
| TotalNet PremiumsEarned                                                            |  | $ | 42,475 |   |  | $ | 38,958 |   |
|                                                                                    |

Premiumincome on credit swaps sold was higher for the year ended December 31,2004 primarily as a result of the expansion in our credit swapportfolio. The notional amounts outstanding of credit swaps we soldwere $10.5 billion and $6.3 billion at December 31, 2004 and 2003,respectively. The increase in premium income due to the expansion inthe swap portfolio was tempered by the lower average premiums earnedduring 2004, a result of general declines in the market levels of swappremiums during 2003 and 2004, coupled with the early termination ofcertain swaps during this period.

The premium expense on creditswaps purchased as short-term investments was $927 thousand and $19thousand for the years ended December 31, 2004 and 2003, respectively.This activity commenced late in 2003. The notional amounts outstandingon credit swaps purchased as short-term investments were $468.2 millionand $130.0 million at December 31, 2004 and 2003, respectively.

The notional amounts of credit swaps that we had purchased to offsetcredit risk on certain swaps sold were $5.0 million at December 31,2004 and December 31, 2003, representing the same transactions. Noadditional transactions of this nature occurred in the 2004 period.

38

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Net Realized Gains (Losses) on CreditSwaps

Our business strategy is generally to hold swaps wesell until maturity. However, there are circumstances in which we mayterminate a credit swap prior to maturity, either as a result of creditconsiderations or in order to realize gains. We cannot identify at theoutset of any credit swap transaction whether the credit swap will beterminated or otherwise disposed of prior to its maturity. If thecredit swaps we terminate are at attractive market values, we are ableto realize gains. Terminating transactions also allows us to acceleratepremium receipts and provides for additional growth capacity within ourcredit swap portfolio. We terminated $804.5 million and $977.0 millionnotional amount of credit swaps sold during 2004 and 2003,respectively. Net realized gains on the early termination of creditswaps were $5.5 million and $17.6 million for the years endedDecember 31, 2004 and 2003, respectively.

In certaincircumstances we will terminate a credit swap at a realized loss. Ingeneral, we terminate credit swaps at a loss where we perceive that thecredit quality of the underlying reference entity risk hasdeteriorated, and we wish to reduce or eliminate our exposure to thereference entity. We realized losses of $1.1 million and $264 thousandfor the years ended December 31, 2004 and 2003, respectively, throughthe termination of credit swaps to mitigate our credit exposure.

Where we have purchased credit protection as a short-terminvestment, early termination of the credit swaps is a fundamental partof the business strategy. We terminated $257.7 million and $5.0 millionnotional amount of credit swaps purchased during 2004 and 2003,respectively, realizing a net gain of $1.1 million and $28 thousand,respectively.

Primus Financial may purchase protection to offsetthe risk of its positions on certain credit swaps sold. Terminations ofcredit swaps purchased to offset credit risk on credit swaps sold,created realized losses of $448 thousand during 2003, with no liketransactions occurring during 2004.

Net realized gains (losses)for the years ended December 31, 2004 and 2003 are summarizedbelow:

|                                                                                                      |
|------------------------------------------------------------------------------------------------------|
|                                                                                                      |  |  |  |  |  |  |  |  |  |  |
| ($in thousands)                                                                                      |  | Year endedDecember31, |
|                                                                                                 |  | 2004 |  | 2003 |
| Realizedgains on terminated credit swapssold                                                         |  | $ | 5,533 |   |  | $ | 18,313 |   |
| Realized losseson terminated credit swapssold                                                        |  |   | (1,139 | )  |  |   | (264 | )  |
| Realized gains onterminated credit swaps purchased as short-terminvestments                          |  |   | 1,260 |   |  |   | 28 |   |
| Realized losseson terminated credit swaps purchased as short-terminvestments                         |  |   | (132 | )  |  |   | — |   |
| Realizedlosses on terminated credit swaps purchased to offset credit risk oncertain credit swapssold |  |   | — |   |  |   | (448 | )  |
| TotalNet Realized Gains on creditswaps                                                               |  | $ | 5,522 |   |  | $ | 17,629 |   |
|                                                                                                      |

NetUnrealized Gains (Losses) on Credit Swaps

Net unrealizedlosses on credit swaps were $0.3  million for the year endedDecember 31, 2004 as compared with a gain of $46.7  million forthe year ended December 31, 2003. Net unrealized gains or losses oncredit swaps reflect the change in the fair value of our credit swapportfolio. The absence of significant unrealized gains on credit swapsfor the year ended December 31, 2004 is a result of the much smallerincrease in the fair value of the portfolio of credit swaps sold during2004 as compared with 2003, primarily due to much greater net decreasesin market credit swap premium levels during 2003. For the year endedDecember 31, 2004, we incurred an unrealized loss of $2.2 million onthe portfolio of credit swaps purchased as short-term investments, ascompared with a gain of $23 thousand for the year ended December 31,2003.

39

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The unrealized gains (losses) on creditswaps sold and credit swaps purchased as short-term investments and forcredit risk offset purposes for 2004 and 2003 are summarizedbelow:

|                                                                                                |
|------------------------------------------------------------------------------------------------|
|                                                                                                |  |  |  |  |  |  |  |  |  |  |
| ($in thousands)                                                                                |  | Years EndedDecember31, |
|                                                                                           |  | 2004 |  | 2003 |
| Netunrealized gains on credit swapssold                                                        |  | $ | 1,899 |   |  | $ | 46,663 |   |
| Net unrealizedgains (losses) on credit swaps purchased as short-terminvestments                |  |   | (2,225 | )  |  |   | 23 |   |
| Netunrealized gains on credit swaps purchased to offset credit riskon certain credit swapssold |  |   | 58 |   |  |   | 53 |   |
| Nettotal Unrealized Gains (Losses) on creditswaps                                              |  | $ | (268 | )  |  | $ | 46,739 |   |
|                                                                                                |

AssetManagement Fees

We commenced our third party assetmanagement activity during 2004 and earned fees of $15 thousand throughDecember 31, 2004. The fees earned represent the accrual of annualmanagement fees. Our asset management contracts also provide forcontingent performance fees, none of which have been earned or accruedat December 31, 2004.

Interest Income Earned

Wehad interest income of $4.9  million and $2.6  million forthe years ended December 31, 2004 and 2003, respectively. The increasedinterest income is attributable to average higher invested balances andhigher yields in the cash equivalents and short-term investmentaccounts as compared with the year ended December 31, 2003. Averageyields on the cash equivalent and short-term investments were1.3% in the year ended December 31, 2004 and 1.1% in theyear ended December 31, 2003. This increase is primarily due to ageneral increase in market interest rates in the latter part of 2004.Our cash, cash equivalents and short-term investments wereapproximately $482.1 million and $261.9 million as of December 31, 2004and 2003, respectively.

Foreign currency revaluation

We started selling Euro-denominated credit swaps in February 2003and by December 31, 2004, Euro-denominated credit swaps comprised29.3% of the notional amount of our credit swaps sold portfolio.The Euro has appreciated in value against the U.S. dollar during 2004,and this appreciation resulted in a net gain of $726 thousand for theyear ended December 31, 2004. For the year ended December 31, 2003, theforeign currency revaluation was not significant, and is included innet credit swap revenue in our statement of operations.

Operating Expenses

Our operating expenses were$27.0  million and $25.9 million for the years ending December31, 2004 and 2003, respectively, as summarized below:

|                                          |
|------------------------------------------|
|                                          |  |  |  |  |  |  |  |  |  |  |
| ($in thousands)                          |  | Years EndedDecember31, |
|                                     |  | 2004 |  | 2003 |
| Employeecompensation                     |  | $ | 17,801 |   |  | $ | 11,701 |   |
| Professionaland legal fees               |  |   | 2,414 |   |  |   | 3,369 |   |
| Fixedasset depreciation andamortization  |  |   | 1,951 |   |  |   | 5,831 |   |
| Technologyand datafeeds                  |  |   | 1,363 |   |  |   | 1,336 |   |
| Excess-of-lossinsurancepremium           |  |   | — |   |  |   | 727 |   |
| Other                                    |  |   | 3,476 |   |  |   | 2,933 |   |
| TotalOperatingExpenses                   |  | $ | 27,005 |   |  | $ | 25,897 |   |
| Numberof full-time employees, at yearend |  |   | 33 |   |  |   | 29 |   |
|                                          |

The increase in employeecompensation over these periods was primarily due to the increase inthe number of employees as the business expanded its operations,coupled with the increased expense 

40

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associated with the vesting of employee stockand option awards. The IPO resulted in the accelerated vesting ofemployee stock and option grants which resulted in additional expenseof $3.3 million in the last quarter of 2004. Professional and legalfees relate to audit and tax advisor expenses, legal costs and directorand officer insurance expense. The primary reason for the decrease inprofessional and legal fees in 2004 is lower audit fees incurred during2004, as compared with 2003 when we completed our initial audit. Fixedasset amortization and depreciation principally relates to theamortization of our internally developed software and the depreciationof our furniture and fixtures. Software amortization decreased byapproximately $3.9 million for the year ended December 31, 2004,compared with the year ended December 31, 2003, as a result of awrite-off during 2003 of approximately $3.2 million relating topreviously capitalized software that was no longer in active use by thecompany. Technology and data feed expense relates to the maintenance ofour technology platform and the cost of providing electronic data toour credit and investing teams, and remained consistent with the prioryear. The excess-of-loss insurance policy premium expense in 2003relates to a surety policy to cover excess credit losses, which PrimusFinancial acquired in March 2002 and terminated in March 2003, as itwas no longer required as support for its ratings by the ratingagencies. Other operating expenses include rent, bank fees, ratingagency fees, brokerage expense, travel and entertainment, exchange feesand other administrative expenses, which increased over the prior yeardue to the expansion of our operations, and our listing on theNYSE.

Interest Expense and Preferred Distributions

For the year ended December 31 2004, we incurred $867 thousand ofinterest expense on the $75.0 million 30-year subordinated debt thatwas issued by Primus Financial in July 2004. The interest rate for the30-year subordinated debt is fixed at 2.57% for a period of oneyear from the issuance date. Primus Financial also made netdistributions of $2.1 million and $1.9 million during 2004 and 2003,respectively, on the PFP Cumulative Preferred Stock issued in December2002. The average rate paid on these securities was 2.06% and1.84%, during the years ended December 31, 2004 and 2003,respectively.

Income Taxes

Benefit (provisions)for income taxes were $(46) thousand and $172 thousand for the yearsended December 31, 2004 and 2003, respectively. Primus Guaranty had anet deferred tax asset fully offset by a valuation allowance of $9.3million and $5.9 million as of December 31, 2004 and 2003,respectively. The change in the deferred tax asset and valuationallowance between 2003 and 2004 results from Primus AssetManagement's estimated net operating loss. As previouslydiscussed, it is expected that only the income of Primus AssetManagement and its subsidiary, Primus Re, are likely to be subject toUnited States federal and local income taxes. However, were PrimusBermuda to be subject to income tax, at a combined United Statesfederal, New York State and New York City income tax rate of46%, on its United States GAAP income, then its income taxexpense (excluding interest and penalties) would have beenapproximately $13.1 million for 2004 and $37.0 million for 2003. Thesefigures assume that Primus Financial is not deemed to be makingdistributions to Primus Bermuda; such distributions would subjectPrimus Bermuda to an additional United States federal branch profitstax.

Year Ended December 31, 2003 Compared with Year EndedDecember 31, 2002

We had net income (loss) of $78.5 million and$(3.1) million for the years ended December 31, 2003 and 2002,respectively. The increase in net income in 2003 was driven by thegrowth in premiums from our credit swap portfolio, coupled with theappreciation in its value.

Net Credit Swap Revenue

Net credit swap revenue was $103.3  million and $14.8million for the years ended December 31, 2003 and 2002, respectively.Net credit swap revenue includes:

|              |                     |
|--------------|---------------------|
| •  | Netpremiums earned; |

|              |                                                 |
|--------------|-------------------------------------------------|
| •  | Net realized gains(losses) on credit swaps; and |

41

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|              |                                               |
|--------------|-----------------------------------------------|
| •  | Net unrealizedgains (losses) on credit swaps. |

The table below shows thecomponent parts of net credit swap revenue for the years ended December31, 2003 and2002.

|                                             |
|---------------------------------------------|
|                                             |  |  |  |  |  |  |  |  |  |  |
| ($in thousands)                             |  | Years endedDecember31, |
|                                        |  | 2003 |  | 2002 |
| Netpremiums earned                          |  | $ | 38,958 |   |  | $ | 12,131 |   |
| Netrealized gains on creditswaps            |  |   | 17,629 |   |  |   | 2,843 |   |
| Net unrealizedgains (losses) on creditswaps |  |   | 46,739 |   |  |   | (213 | )  |
| TotalNet Credit SwapRevenue                 |  | $ | 103,326 |   |  | $ | 14,761 |   |
|                                             |

NetPremiums Earned

Net premiums earned were $39.0 million and$12.1 million for the years ended December 31, 2003 and 2002,respectively. Net premiums earned include:

|              |                                      |
|--------------|--------------------------------------|
| •  | Premium income on credit swaps sold; |

|              |                                                                         |
|--------------|-------------------------------------------------------------------------|
| •  | Premium expense on credit swaps purchasedas short-term investments; and |

|              |                                                                                             |
|--------------|---------------------------------------------------------------------------------------------|
| •  | Premiumexpense on credit swaps purchased to offset credit risk on certaincredit swaps sold. |

|                                                                                    |
|------------------------------------------------------------------------------------|
|                                                                                    |  |  |  |  |  |  |  |  |  |  |
| ($in thousands)                                                                    |  | Years endedDecember31, |
|                                                                               |  | 2003 |  | 2002 |
| Premiumincome on credit swapssold                                                  |  | $ | 39,112 |   |  | $ | 12,115 |   |
| Premium expenseon credit swaps purchased as short-terminvestments                  |  |   | (19 | )  |  |   | — |   |
| Premiumexpense on credit swaps purchased to offset credit risk on certainswapssold |  |   | (135 | )  |  |   | (24 | )  |
| TotalNet PremiumsEarned                                                            |  | $ | 38,958 |   |  | $ | 12,131 |   |
|                                                                                    |

Premiumincome on credit swaps sold was higher for the year ended December 31,2003 primarily as a result of the expansion in our credit swapportfolio and because premium income was only earned for a portion of2002 as our credit swap activity began in June 2002. The notionalamounts outstanding of credit swaps we sold were $6.3 billion and $4.7billion at December 31, 2003 and 2002, respectively.

The premiumexpense accrued on credit swaps purchased as short-term investments was$19 thousand for the year ended December 31, 2003. This activitycommenced in 2003, and we therefore incurred no credit swap premiumexpense in 2002. The notional amount outstanding on credit swapspurchased as short-term investments was $130.0 million at December 31,2003.

The notional amounts of credit swaps that we had purchasedto offset credit risk on certain swaps sold were $5.0 million and $10.0million at December 31, 2003 and 2002, respectively. The premiumexpense incurred as a result of our credit risk offset activity rose in2003 because we had credit risk offset transactions in place throughout2003.

Net Realized Gains (Losses) on Credit Swaps

We terminated $977.0 million and $130.0 million notional amount ofcredit swaps sold during 2003 and 2002, respectively. Net realizedgains on the early termination of credit swaps were $17.6 million and$2.8 million for the years ended December 31, 2003 and 2002,respectively. Net realized gains increased from 2002 to 2003 as aresult of an increased volume of early terminations because the generalincrease in the fair value of credit swaps in 2003 enabled us toterminate transactions and realize gains.

Where we havepurchased credit protection as a short-term investment, earlytermination of the credit swaps is a fundamental part of the businessstrategy. This strategy commenced in 2003. We terminated $5 million innotional amount of credit swaps purchased during 2003, realizing a gainof $28 thousand.

42

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Primus Financial may purchase protectionto offset the risk of its positions on certain credit swaps sold. Inthe event that premium levels on these credit swaps sold decline,indicating a lower risk of default, Primus Financial may unwind thetransaction. Terminations of credit swaps purchased to offset creditrisk on credit swaps sold, created realized losses of $448 thousandduring 2003, with no like transactions occurring in 2002.

Netrealized gains (losses) for the years ended December 31, 2003 and 2002are summarizedbelow:

|                                                                                                      |
|------------------------------------------------------------------------------------------------------|
|                                                                                                      |  |  |  |  |  |  |  |  |  |  |
| ($in thousands)                                                                                      |  | Year endedDecember31, |
|                                                                                                 |  | 2003 |  | 2002 |
| Realizedgains on terminated credit swapssold                                                         |  | $ | 18,313 |   |  | $ | 3,145 |   |
| Realized losseson terminated credit swapssold                                                        |  |   | (264 | )  |  |   | (302 | )  |
| Realized gains onterminated credit swaps purchased as short-terminvestments                          |  |   | 28 |   |  |   | — |   |
| Realizedlosses on terminated credit swaps purchased to offset credit risk oncertain credit swapssold |  |   | (448 | )  |  |   | — |   |
| TotalRealized Gains on creditswaps                                                                   |  | $ | 17,629 |   |  | $ | 2,843 |   |
|                                                                                                      |

NetUnrealized Gains (Losses) on Credit Swaps

Net unrealizedgains (losses) on credit swaps was a gain of $46.7  million forthe year ended December 31, 2003, compared with a loss of $213 thousandfor the year ended December 31, 2002. The increase in unrealized gainson credit swaps reflects the change in the fair value of our creditswap portfolio and is primarily a result of the reduction in marketcredit swap premium levels experienced during 2003.

Theunrealized gains (losses) on credit swaps sold and credit swapspurchased as short-term investments and for credit risk offset purposesfor 2003 and 2002 are summarizedbelow:

|                                                                                                         |
|---------------------------------------------------------------------------------------------------------|
|                                                                                                         |  |  |  |  |  |  |  |  |  |  |
| ($in thousands)                                                                                         |  | Years EndedDecember31, |
|                                                                                                    |  | 2003 |  | 2002 |
| Netunrealized gains (losses) on credit swapssold                                                        |  | $ | 46,663 |   |  | $ | 105 |   |
| Net unrealizedgains on credit swaps purchased as short-terminvestments                                  |  |   | 23 |   |  |   | — |   |
| Netunrealized gains (losses) on credit swaps purchased to offset creditrisk on certain credit swapssold |  |   | 53 |   |  |   | (318 | )  |
| Nettotal Unrealized Gains (Losses) on creditswaps                                                       |  | $ | 46,739 |   |  | $ | (213 | )  |
|                                                                                                         |

InterestIncome Earned

We had interest income of $2.6  millionand $1.6  million for the years ended December 31, 2003 and 2002,respectively. The increase in the interest income is attributable tothe growth in the balances of cash equivalents and short-terminvestments during the year ended December 31 2003, compared with theyear ended December 31, 2002. Average yields on the cash equivalent andshort-term investments fell from 1.3% in 2002 to 1.1% in2003, primarily due to a general decrease in market interest rates overthe period. Our cash, cash equivalents and short-term investments wereapproximately $261.9 million and $221.0 million as of December 31, 2003and 2002, respectively.

43

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Operating Expenses

Ouroperating expenses were $25.9 million and $19.2 million for the yearsending December 31, 2003 and 2002, respectively. Operating expenses aresummarized below:

|                                          |
|------------------------------------------|
|                                          |  |  |  |  |  |  |  |  |  |  |
| ($in thousands)                          |  | Years EndedDecember31, |
|                                     |  | 2003 |  | 2002 |
| Employeecompensation                     |  | $ | 11,701 |   |  | $ | 8,156 |   |
| Professionaland legal fees               |  |   | 3,369 |   |  |   | 4,002 |   |
| Fixedasset depreciation andamortization  |  |   | 5,831 |   |  |   | 1,848 |   |
| Technologyand datafeeds                  |  |   | 1,336 |   |  |   | 1,108 |   |
| Excess-of-lossinsurancepremium           |  |   | 727 |   |  |   | 1,854 |   |
| Other                                    |  |   | 2,933 |   |  |   | 2,230 |   |
| TotalOperatingExpenses                   |  | $ | 25,897 |   |  | $ | 19,198 |   |
| Numberof full-time employees, at yearend |  |   | 29 |   |  |   | 19 |   |
|                                          |

The increase in employeecompensation over these periods was primarily due to the increase inthe number of employees as the business expanded its operations. Fixedasset amortization and depreciation principally relates to theamortization of our internally developed software and the depreciationof our furniture and fixtures. Software amortization increased byapproximately $3.2 million in 2003 as a result of the write-off ofpreviously capitalized software that was no longer in active use by us.The excess-of-loss insurance policy premium related to a surety policyto cover excess credit losses, which Primus Financial acquired in March2002 and terminated in March 2003, resulting in a decreased expense in2003. Other operating expenses include rent, bank fees, rating agencyfees, brokerage expense, travel and entertainment, and otheradministrative expenses, all of which had an overall increase over theprior year due to our expanded operations.

PreferredDistributions

In 2003, Primus Financial made netdistributions of $1.9 million on the PFP Cumulative Preferred Stockissued in December 2002. The average rate paid on these securities was1.84% during the year ended December 31, 2003.

IncomeTaxes

Benefits (provisions) for income taxes were $172thousand and $(254) thousand for the years ended December 31, 2003 and2002, respectively. Primus Guaranty had a net deferred tax asset fullyoffset by a valuation allowance of $5.9 million and $4.5 million as ofDecember 31, 2003 and 2002, respectively. The change in the deferredtax asset and valuation allowance between 2002 and 2003 results fromPrimus Asset Management's estimated net operating loss. Aspreviously discussed, it is expected that only the income of PrimusAsset Management and its subsidiary, Primus Re, are likely to besubject to United States federal, and local income taxes. However, werePrimus Bermuda to be subject to income tax, at a combined United Statesfederal, New York State and New York City income tax rate of46%, on its United States GAAP income, then its income taxexpense (excluding interest and penalties) would have beenapproximately $37.0 million for 2003 and $80 thousand for 2002. Thesefigures assume that Primus Financial is not deemed to be makingdistributions to Primus Bermuda; such distributions would subjectPrimus Bermuda to an additional United States federal branch profitstax.

44

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Contractual Obligations

Thefollowing table summarizes our contractual obligations at December 31,2004 and the effect that those obligations are expected to have on ourliquidity and cash flows in futureperiods:

|                                      |  |                     |        |                 |  |           |         |           |  |                  |         |           |  |        |         |           |  |        |        |        |  |  |
|--------------------------------------|--|---------------------|--------|-----------------|--|-----------|---------|-----------|--|------------------|---------|-----------|--|--------|---------|-----------|--|--------|--------|--------|--|--|
|                                 |  | Paymentdue byperiod |
|                                 |  | Total               |        | Lessthan 1 year |  | 1-3 years |         | 3-5 years |  | Morethan 5 years |
| PropertyLease                        |  | $                   | 5,761  |            |  | $         | 738     |      |  | $                | 1,512   |      |  | $      | 1,530   |      |  | $      | 1,981  |   |
| Subordinateddeferrable interestnotes |  |                | 75,000 |            |  |      | — | (a)  |  |             | — | (a)  |  |   | — | (a)  |  |   | 75,000 |   |
| Total                                |  | $                   | 80,761 |            |  | $         | 738     |      |  | $                | 1,512   |      |  | $      | 1,530   |      |  | $      | 76,981 |   |
|                                      |

|     |                                                                                                                                         |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------|
| (a) | Paymentson the subordinated deferrable interest notes for the next five yearscannot be determined, as it is an auction rate obligation. |

Property Lease:    Primus Financial has leased its premisesat 360 Madison Avenue, New York, New York from Madison 45 LLC at afixed yearly rental (subject to certain escalations specified in thelease) until August 1, 2012. There are no material restrictions imposedby the lease agreement and the lease is categorized as an operatinglease.

Subordinated deferrable interest notes:    Forinformation on the terms of our subordinated deferrable interest notes,see Note 9 to our consolidated financial statements.

We have noother material long-term contractual obligations.

Liquidity andCapital Resources

Capital Strategy

In connection withthe commencement of our operations on March 14, 2002, we werecapitalized with $155.0 million from the issuance of our Series Aconvertible voting preferred shares, or Series A Preferred Shares, totwo subsidiaries of XL Capital Ltd, or XL, Transamerica Life InsuranceCompany, a subsidiary of AEGON USA, Pacific Corporate Group/CalPERS andRadian Group Inc., or Radian. In connection with the issuance of theSeries A preferred shares, we issued warrants to Radian enabling it topurchase 1,061,059 common shares at a exercise price of $5.18 pershare. On May 15, 2004, Radian exercised these warrants as result ofwhich we received $5.5 million. Upon completion of our IPO, all of theSeries A preferred shares were converted into common shares of thecompany.

Primus Financial issued $110.0 million of PFPCumulative Preferred Stock on December 19, 2002 in two series, Series Iand Series II, to a trust, (the "Trust"). Inconjunction with the receipt of the securities, the Trust issued $100.0million of Money Market Preferred Securities Custodial Receipts, or MMPReceipts, in two series, Series A and Series B, to variousinstitutional investors in a private placement. The Trust also issued$10.0 million of Variable Inverse PreferredTM Securities CustodialReceipts that were retained by Primus Financial. One series paysdistributions every 28 days based on an auction rate set on the priorbusiness day and the other series makes payments quarterly, based on anauction rate, which is currently set annually, and was last set inJanuary 2004. After December 19, 2012, Primus Financial may redeem thePFP Cumulative Preferred Stock, in whole or in part, on anydistribution date at the face amount plus accumulated and unpaiddividends. However, Primus Financial is not required to redeem the PFPCumulative Preferred Stock, nor is it required to establish a sinkingfund. For the years ended December 31, 2004 and 2003, Primus Financialmade net distributions to the Trust's MMP Receipts in an amountequal to $ 2.1 million and $1.9 million, respectively.

Primus Financial issued $75.0 million of subordinated deferrableinterest notes on July 23, 2004. The notes are subordinated in right ofpayment to the prior payment in full of all existing and future seniorindebtedness of the company, including counterparty claims. The notesare redeemable at the option of Primus Financial, in whole or in part,on any auction date, at a redemption price equal to 100% of theprincipal amount of the notes to be redeemed, plus any accrued andunpaid interest 

45

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thereon to the redemption date. The interestrate on the notes is fixed at a rate of 2.57% for a period ofone year. The notes mature in July 2034.

Primus Guarantycompleted an IPO on October 5, 2004, listing its shares on the NYSE.The company issued 9,143,493 shares at a price of $13.50. Proceeds tothe company were $110.7 million, net of the underwriting discount andoffering expenses. Primus Guaranty concurrently contributed $60.0million of the IPO proceeds to Primus Financial to support the growthof its credit swap business. Primus Guaranty has invested the remainingnet proceeds in short-term money market instruments, pendingutilization in its credit swap business and/or other businesses relatedto the credit markets.

Additionally, as required by ouroperating guidelines, Primus Financial maintains a $37.5 millionliquidity facility with Harris Trust and Savings Bank, or Harris Trust.The purpose of the liquidity facility is to provide Primus Financialwith cash in the event it is obligated to purchase a ReferenceEntity's debt obligation as the result of a credit event andcould not liquidate its investments in order to settle a purchase on atimely basis. The liquidity facility requires that Primus Financialhave United States government securities available to pledge ascollateral on any advances made under the facility. The facility isrenewable on an annual basis at the option of Primus Financial orHarris Trust. At December 31, 2004, the facility had a maturity date ofMarch 2005. As of December 31, 2004, there have been no credit eventsand there have been no borrowings under the facility.

We receivecash from the receipt of credit swap premiums, the net proceeds fromthe early termination of credit swaps, interest income earned on ourinvestment portfolio and capital raising activities. Cash has been usedto pay our operating expenses, administrative expenses, premiums oncredit swaps we have purchased and preferred share distributions. Ourcash, cash equivalents and short-term investments were approximately$482.1  million, $261.9  million and $221.0 million as ofDecember 31, 2004, 2003 and 2002, respectively.

PrimusFinancial, in order to support its AAA/Aaa ratings, is required tomaintain capital in an amount determined by the capital models it hasagreed upon with S&P and Moody's. The capital required isprimarily a function of Primus Financial's credit swap portfoliocharacteristics, operating expenses and tax position. Retained cashflow and proceeds from financings are utilized to increase our capitalresources to support our credit swap business.

Cash Flows

Cash flows from operating activities – Net cashprovided by operating activities was $33.1 million and $43.5 millionfor the years ended December 31, 2004 and 2003, respectively. Thisdecrease is primarily attributable to the decrease in operating incomeadjusted for non-cash items, which is mainly a result of lower realizedgains for the year ended December 31, 2004 as compared to the yearended December 31, 2003, partially offset by the increase in premiumsearned from credit swaps sold.

Net cash provided by (used in)operating activities was $43.5 million and $(8.2) million for the yearsended December 31, 2003 and 2002, respectively. This increase islargely attributable to the increase in premiums earned from creditswaps sold in 2003, as we began our credit swap activity in June of2002, as well as the increase in realized gains during 2003 as comparedwith 2002.

Cash flows from investing activities –Net cash used in investing activities was $158.1 million and $4.6million for the years ended December 31, 2004 and 2003, respectively.During 2004, we invested $157.1 million in short-term investments ascompared with $4.0 million in 2003. This additional cash invested wasderived from our IPO in September of 2004, as well as proceeds from theissuance of subordinated deferrable interest notes in July of 2004.

Net cash used in investing activities was $4.6 million and $14.2million for the years ended December 31, 2003 and 2002, respectively.The decrease in use of cash is due to the costs associated with thepurchase of internal use software of $12.4 million in 2002, as comparedto $0.5 million in 2003, in connection with the development of ourtechnology and transactional platform for our credit swap operations.In addition, there was a decrease in fixed asset purchases of $1.7million in 2003 from 2002, as the majority of our initial fixed assetswere purchased during 2002 when we moved into our corporate offices at360 Madison Avenue.

46

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Cash flows from financing activities– Net cash provided by (used in) financing activities was$188.0 million and $(1.9) million for the years ended December 31, 2004and 2003, respectively. This increase is due to our IPO in September of2004, from which proceeds were $110.7 million, net of underwritingdiscounts and offering expenses, as well as the issuance ofsubordinated deferrable interest notes in 2004 of $75.0 million. Inaddition, in 2004 Radian exercised warrants, yielding proceeds to thecompany of $5.5 million. This increase was partially offset bypreferred distributions of $2.1 million in 2004, as compared to $1.9million distributed in 2003.

Net cash provided by (used in)financing activities was $(1.9) million and $243.2 million for theyears ended December 31, 2003 and 2002, respectively. The change isprimarily due to the proceeds received for the issuance of preferredsecurities by Primus Financial, as well as our issuance of the Series Apreferred stock, both in 2002.

With our current capitalresources and anticipated future credit swap premium receipts andinterest income, we believe we have sufficient liquidity to pay ouroperating expenses and preferred distributions over at least the nexttwelve months.

Additional Information

U.S. GAAPapplicable to derivative contracts requires us to account for thecredit swaps that we buy or sell at fair value. The fair value ofcredit swaps is primarily determined by market credit swap premiumlevels, as well as the size and tenor of our swaps, and interest ratesused to discount future cash flows. Premium levels, in turn, are drivenby a number of factors, including the number and size of marketparticipants willing to buy or sell credit protection at any given timeand the market's perception of credit risk over the life of aparticular credit swap. The latter is in turn a function ofmacroeconomic factors such as the overall state of the economy,corporate financial health and leverage, and geopolitical concerns. Asa general matter, given our strategy of holding credit swaps sold untilmaturity, we do not seek to manage our overall exposure to marketcredit swap premium levels by terminating credit swaps prior to theirmaturity. Accordingly, we expect fluctuations in the fair value of ourcredit swap portfolio as a result of changes in credit swap premiumsover time. These period-to-period changes in value have no significanteffect on our business, our economic performance or cash flow. However,reflecting our credit swap portfolio at fair value produces significantchanges in our revenue and net income from period to period as themarket values of our credit swaps fluctuate.

Despite ourstrategy of holding credit swaps sold to maturity, we occasionallydispose of credit swaps prior to maturity, but only in circumstanceswhere we believe that the underlying risk related to the credit swaphas increased beyond our risk tolerance or where we seek to rebalanceour portfolio and create greater capacity for other credit swaps. UnderUnited States GAAP, the full amount of any realized gains and losses onthe termination of credit swaps is included in our revenueimmediately.

In managing our business and assessing its growthand profitability from a strategic and financial planning perspective,we believe it is appropriate to consider both our United States GAAPfinancial results as well as the impact on those results of fair valueaccounting and the termination of credit swaps. Therefore, we evaluatewhat our economic results would have been if we excluded from revenuethe amounts of any unrealized gains and losses on our portfolio ofcredit swaps sold, and any realized gains from terminations of creditswaps sold prior to maturity, although we amortize those realized gainsover the remaining original lives of the terminated contracts. Ourboard of directors also uses these results in assessing ourmanagement's performance and determining compensation.

47

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In the years ended December 31, 2004 and2003, we realized $5.5 million and $18.3 million of gains,respectively, from the early termination of credit swaps sold. Theamortized gains for those years were $6.2  million and $2.9million, respectively. At December 31, 2004, future amortization ofgains from all credit swaps terminated prior to that date will berecognized as follows (inthousands):

|                              |
|------------------------------|
|                              |  |  |  |  |  |  |
| Yearending December 31, 2005 |  | $ | 6,544 |   |
| Year endingDecember 31, 2006 |  |   | 6,483 |   |
| Year ending December31, 2007 |  |   | 4,427 |   |
| Year ending December 31,2008 |  |   | 401 |   |
| Year ending December 31,2009 |  |   | 15 |   |
|                              |

Recent AccountingPronouncements

In January 2003, the FASB issued InterpretationNo. 46, or FIN 46, "Consolidation of Variable InterestEntities, an Interpretation of ARB No. 51." TheInterpretation defines "variable interests"and specifies the circumstances under which consolidation of specialpurpose entities will be dependent upon such interests. In December2003, the FASB issued FASB Interpretation No. 46 (revised December2003), or FIN 46R, which effectively modified and clarified certainprovisions of FIN 46, as originally issued, and modified the effectivedate for certain entities.

The provisions of FIN 46, as revised,were adopted as of December 31, 2003, for our interests in all VIEs.The result was the derecognition of the MMP Receipts issued by theTrust and the recognition of the Primus Financial Cumulative PreferredStock issued by Primus Financial to the Trust. The adoption of FIN 46Rhad no impact on our financial condition or the results ofoperations.

In December 2004, the FASB issued SFAS 123R"Share-Based Payment." SFAS 123R replacesFASB Statement No. 123, "Accounting for Stock-BasedCompensation", and supersedes APB Opinion No. 25,"Accounting for Stock Issued to Employee."SFAS 123R eliminates the choice of alternative accounting methods, andrequires that all entities follow the fair value based method of SFAS123. Public entities will be required to apply Statement 123R as of thefirst interim or annual reporting period that begins after June 15,2005. The adoption of SFAS 123R is not expected to have a significantimpact on our financial statements.

In December 2004, the FASBissued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment ofAPB Opinion No. 29, Accounting for Nonmonetary Transactions. APBOpinion No. 29 is based on the principle that exchanges of nonmonetaryassets should be measured based on the fair value of the assetsexchanged. The guidance in that Opinion, however, included certainexceptions to that principle. This Statement amends Opinion 29 toeliminate the exception for nonmonetary exchanges of similar productiveassets and replaces it with a general exception for exchanges ofnonmonetary assets that do not have commercial substance, that is, ifthe future cash flows of the entity are not expected to changesignificantly as a result of the exchange. The provisions of thisstatement are effective for nonmonetary asset exchanges occurring infiscal periods beginning after June 15, 2005. We anticipate that SFAS153 will not have an impact on our financial statements.

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Item 7A.    Quantitative andQualitative Disclosures about Market Risk

Market riskrepresents the potential for losses that may result from changes in thevalue of a financial instrument as a consequence of market conditions.Our primary market risk is increasing or decreasing market credit swappremium levels, which increase or decrease the fair value of our creditswap portfolio. Market credit swap premium levels change as a result ofspecific events or news related to a Reference Entity, such as a changein a credit rating by any of the rating agencies. Additionally, marketcredit swap premium levels can vary as a result of changes in marketsentiment. As a general matter, given our strategy of holding creditswaps sold until maturity, we do not seek to manage our overallexposure to market credit swap premium levels, and we expectfluctuations in the fair value of our credit swap portfolio as a resultof these changes. In cases where we purchase credit swaps as short-terminvestments, we incur the cost of paying premiums until we terminatethe purchased credit protection. We undertake these transactions in theexpectation that the market credit swap premium level for the ReferenceEntity will rise subsequent to our purchase of protection, but anygains realized upon termination may not suffice to offset the premiumexpense we have incurred while holding the purchased credit protection.Indeed, the market credit swap premium level for the Reference Entitymay fall and we may incur termination losses as well as premium expenseas a result. The fair value of our credit swaps purchased will beaffected by market credit swap premium levels, which will affect ournet income. Currently, we purchase a limited amount of creditprotection, relative to the size of our portfolio of credit swaps sold,and the cost of purchased credit protection does not materially impactour overall operating margin. The notional amount outstanding on creditswaps we purchased as short-term investments was $468.2 million atDecember 31, 2004.

We face other market risks, which are likelyto have a lesser impact upon our net income than those associated withmarket credit swap premium level risk. These other risks includeinterest rate risk associated with market interest rate movements.These movements may affect the value of our credit swap portfolio asour pricing model includes an interest rate component, which is used todiscount future expected cash flows. Interest rate movements may alsoaffect the carrying value of our investments. The Primus FinancialCumulative Preferred Stock pays distributions that are based upon theauction rate preferred market. A difference between the rates we pay inthe auction rate preferred market and the interest rates we receive onour investments may result in an additional cost to our company.Assuming that auction results with respect to the Primus FinancialCumulative Preferred Stock reflect prevailing short-term interestrates, each 25 basis point increase or decrease in the level of thoserates would increase or decrease Primus Financial's annualdistribution cost by approximately $125,000 for each of the Series Aand Series B MMP Receipts, but would not affect distributions on theSeries B MMP Receipts as the interest and auction rate for such MMPReceipts were set for a one year period on January 20, 2005. Inaddition, interest rate movements may increase or decrease the interestexpense we incur on our $75 million of subordinated deferrable interestnotes. A 25 basis point increase or decrease in the level of thoserates would increase or decrease Primus Financial's interestexpense by $188,000 annually, however at December 31, 2004, theinterest rate on the subordinated deferrable interest notes was set fora one year period expiring in July of 2005. Conversely, since almostall of Primus Financial's $418.9 million cash balance is investedin short-term assets, in the event of such an increase in short-terminterest rates, we would earn additional interest income. We also havesome exposure to currency rates as we have sold Euro-denominated creditswaps. As of December 31, 2004, we have kept the premiums received fromthese transactions in Euro-denominated money market accounts. The valueof the cash Euro balances is translated into United States dollars atcurrent spot rates. Changes in the value of the Euro compared with theUnited States dollar may have an impact on our net income. We do nothedge any interest rate or currency market risks.

Counterpartyrisk represents the potential for loss should one or more of ourcounterparties be unable to meet its obligations due to bankruptcy or asimilar event, which could adversely affect our results of operations.Our counterparties generally have investment grade credit ratings. AtDecember 31, 2004, the notional and fair value amount of credit swapsoutstanding with respect to our counterparties that had credit ratingsof below investment grade were $5.0 million and $52 thousand,respectively. The premiums on these transactions were fully prepaid bythe counterparties.

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Item 8. FinancialStatements and Supplementary Data

Primus Guaranty, Ltd.Index to Consolidated FinancialStatements

|                                                                                                    |  |        |    |        |  |  |
|----------------------------------------------------------------------------------------------------|--|--------|----|--------|--|--|
| Reportof Independent Registered Public AccountingFirm                                              |  |   | 51 |   |
| Consolidated Statements of FinancialCondition as of December 31, 2004 and2003                      |  |   | 52 |   |
| Consolidated Statements ofOperations for the years ended December 31, 2004, 2003 and2002           |  |   | 53 |   |
| ConsolidatedStatements of Shareholders' Equity for the years ended December31, 2004, 2003 and2002. |  |   | 54 |   |
| ConsolidatedStatements of Cash Flow for the years ended December 31, 2004, 2003 and2002            |  |   | 55 |   |
| Notes to Consolidated FinancialStatements                                                          |  |   | 56 |   |
|                                                                                                    |

All Financial StatementSchedules are omitted because they are not applicable or the requiredinformation is shown in the Consolidated Financial Statements or theNotes thereto.

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Report of IndependentRegistered Public Accounting Firm

To the Board ofDirectors and Shareholders' ofPrimus Guaranty, Ltd.

We have audited the accompanying consolidated statements offinancial condition of Primus Guaranty, Ltd. (the"Company") as of December 31, 2004 and 2003,and the related consolidated statements of operations,shareholders' equity, and cash flows for each of the three yearsin the period ended December 31, 2004. These financial statements arethe responsibility of the Company's management. Ourresponsibility is to express an opinion on these financial statementsbased on our audits.

We conducted our audits inaccordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An auditincludes consideration of internal control over financial reporting asa basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company's internal control over financialreporting. Accordingly, we express no such opinion. An audit alsoincludes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, andevaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to abovepresent fairly, in all material respects, the consolidated financialposition of Primus Guaranty, Ltd. at December 31, 2004 and 2003, andthe consolidated results of its operations and its cash flows for eachof the three years in the period ended December 31, 2004, in conformitywith U.S. generally accepted accounting principles.

/s/ Ernst & Young LLPNew York, NY

February 25, 2005

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Primus Guaranty,Ltd. Consolidated Statements of Financial Condition(dollars in 000s except per shareamounts)

|                                                                                                                                                |  |             |         |        |  |        |         |        |  |  |
|------------------------------------------------------------------------------------------------------------------------------------------------|--|-------------|---------|--------|--|--------|---------|--------|--|--|
|                                                                                                                                           |  | December31, |
|                                                                                                                                           |  | 2004        |         | 2003   |
| **Assets**                                                                                                                                     |  |        |    |   |  |   |    |   |
| Cashand cashequivalents                                                                                                                        |  | $           | 320,989 |   |  | $      | 257,967 |   |
| Short-terminvestments                                                                                                                          |  |        | 161,101 |   |  |   | 3,968   |   |
| Accruedinterestreceivable                                                                                                                      |  |        | 1,381   |   |  |   | 129     |   |
| Accruedpremiums on creditswaps                                                                                                                 |  |        | 3,349   |   |  |   | 3,642   |   |
| Premiumsreceivable on creditswaps                                                                                                              |  |        | 197     |   |  |   | 140     |   |
| Premiums receivable onfinancial guarantees                                                                                                     |  |        | 800     |   |  |   | 1,201   |   |
| Assetmanagement feereceivable                                                                                                                  |  |        | 15      |   |  |   | — |   |
| Prepaidexpenses                                                                                                                                |  |        | 868     |   |  |   | 395     |   |
| Unrealized gain oncredit swaps, at fairvalue                                                                                                   |  |        | 46,517  |   |  |   | 46,594  |   |
| Fixed assets,less accumulated depreciation of $493 in 2004 and $259 in2003                                                                     |  |        | 1,800   |   |  |   | 1,651   |   |
| Internal usesoftware costs, less accumulated amortization of $5,893 in 2004 and$4,176 in 2003                                                  |  |        | 4,297   |   |  |   | 5,473   |   |
| Incometax receivable                                                                                                                           |  |        | 279     |   |  |   | 269     |   |
| Debt issuancecosts                                                                                                                             |  |        | 1,125   |   |  |   | — |   |
| Totalassets                                                                                                                                    |  | $           | 542,718 |   |  | $      | 321,429 |   |
| **Liabilitiesand shareholders' equity**                                                                                                        |  |        |    |   |  |
| Accountspayable                                                                                                                                |  | $           | 904     |   |  | $      | 653     |   |
| Compensationpayable                                                                                                                            |  |        | 5,317   |   |  |   | 5,474   |   |
| Brokerage feespayable                                                                                                                          |  |        | 14      |   |  |   | 50      |   |
| Current state andlocal taxespayable                                                                                                            |  |        | 12      |   |  |   | — |   |
| Interestpayable                                                                                                                                |  |        | 364     |   |  |   | — |   |
| Long-termdebt                                                                                                                                  |  |        | 75,000  |   |  |   | — |   |
| Unrealized losson credit swaps, at fairvalue                                                                                                   |  |        | 259     |   |  |   | 68      |   |
| Deferred rentpayable                                                                                                                           |  |        | 455     |   |  |   | 473     |   |
| Deferred financialguaranteepremiums                                                                                                            |  |        | 806     |   |  |   | 1,201   |   |
| Unrealized losson sublease                                                                                                                     |  |        | — |   |  |   | 39      |   |
| Deferredcredit swappremiums                                                                                                                    |  |        | 69      |   |  |   | 112     |   |
| Totalliabilities                                                                                                                               |  |        | 83,200  |   |  |   | 8,070   |   |
| Preferredsecurities ofsubsidiary                                                                                                               |  |        | 98,521  |   |  |   | 98,521  |   |
| Commitmentsand contingencies (see Note14)                                                                                                      |  |        |    |   |  |
| Shareholders'equity:                                                                                                                           |  |        |    |   |  |   |    |   |
| Common stock, $0.08par value, 62,500,000 shares authorized, 42,780,033 and 2,600,000shares issued and outstanding at December 31, 2004 and2003 |  |        | 3,535   |   |  |   | 230     |   |
| AdditionalPaid-in-Capital                                                                                                                      |  |        | 264,860 |   |  |   | 1,325   |   |
| ConvertiblePreferredstock                                                                                                                      |  |        | — |   |  |   | 143,908 |   |
| Warrants                                                                                                                                       |  |        | 612     |   |  |   | 1,070   |   |
| Retainedearnings                                                                                                                               |  |        | 91,990  |   |  |   | 68,305  |   |
| Totalshareholders'equity                                                                                                                       |  |        | 360,997 |   |  |   | 214,838 |   |
| Totalliabilities, preferred securities of subsidiary and shareholders'equity                                                                   |  | $           | 542,718 |   |  | $      | 321,429 |   |
|                                                                                                                                                |

Seeaccompanying notes.

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Primus Guaranty, Ltd. ConsolidatedStatements of Operations(amounts in 000s except per shareamounts)

|                                                         |  |                       |         |         |  |        |         |         |  |        |         |         |  |  |
|---------------------------------------------------------|--|-----------------------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                    |  | YearEnded December31, |         |    |
|                                                    |  | 2004                  |         | 2003    |  | 2002   |
| **Revenues**                                            |  |                  |    |    |  |
| Netcredit swaprevenue                                   |  | $                     | 47,729  |    |  | $      | 103,326 |    |  | $      | 14,761  |    |
| Premiumsearned on financialguarantees                   |  |                  | 395     |    |  |   | — |    |  |   | — |    |
| Interestincome                                          |  |                  | 4,850   |    |  |   | 2,617   |    |  |   | 1,610   |    |
| Rentalincome                                            |  |                  | 40      |    |  |   | 107     |    |  |   | — |    |
| Assetmanagementfees                                     |  |                  | 15      |    |  |   | — |    |  |   | — |    |
| Foreigncurrencyrevaluation                              |  |                  | 726     |    |  |   | — |    |  |   | — |    |
| Other                                                   |  |                  | — |    |  |   | — |    |  |   | 12      |    |
| Totalnetrevenues                                        |  |                  | 53,755  |    |  |   | 106,050 |    |  |   | 16,383  |    |
| **Expenses**                                            |  |                  |    |    |  |
| Employeecompensation andbenefits                        |  |                  | 17,801  |    |  |   | 11,701  |    |  |   | 8,156   |    |
| Excess-of-lossinsurance policypremium                   |  |                  | — |    |  |   | 727     |    |  |   | 1,854   |    |
| Professionaland legalfees                               |  |                  | 2,414   |    |  |   | 3,369   |    |  |   | 4,002   |    |
| Fixedasset depreciation andamortization                 |  |                  | 1,951   |    |  |   | 5,831   |    |  |   | 1,848   |    |
| Technologyand datafeeds                                 |  |                  | 1,363   |    |  |   | 1,336   |    |  |   | 1,108   |    |
| Rent                                                    |  |                  | 744     |    |  |   | 702     |    |  |   | 525     |    |
| Bankfees                                                |  |                  | 576     |    |  |   | 532     |    |  |   | 174     |    |
| Ratingagencyfees                                        |  |                  | 346     |    |  |   | 494     |    |  |   | 544     |    |
| Brokerageexpense                                        |  |                  | 602     |    |  |   | 442     |    |  |   | 363     |    |
| Interestexpense                                         |  |                  | 881     |    |  |   | — |    |  |   | — |    |
| Other                                                   |  |                  | 1,208   |    |  |   | 763     |    |  |   | 624     |    |
| Totalexpenses                                           |  |                  | 27,886  |    |  |   | 25,897  |    |  |   | 19,198  |    |
| Distributionson preferred securities ofsubsidiary       |  |                  | (2,138  | )  |  |   | (1,854  | )  |  |   | — |    |
| Income(loss) before (provision) benefit for incometaxes |  |                  | 23,731  |    |  |   | 78,299  |    |  |   | (2,815  | )  |
| Benefit(provision) for incometaxes                      |  |                  | (46     | )  |  |   | 172     |    |  |   | (254    | )  |
| **NetIncome (loss) available to commonshares**          |  | $                     | 23,685  |    |  | $      | 78,471  |    |  | $      | (3,069  | )  |
| Earnings(loss) per commonshare:                         |  |                  |    |    |  |   |    |    |  |
| Basic                                                   |  | $                     | 1.44    |    |  | $      | 31.18   |    |  | $      | (1.22   | )  |
| Diluted                                                 |  | $                     | 0.59    |    |  | $      | 2.33    |    |  | $      | (1.22   | )  |
| Averagecommon sharesoutstanding:                        |  |                  |    |    |  |   |    |    |  |
| Basic                                                   |  |                  | 16,486  |    |  |   | 2,517   |    |  |   | 2,510   |    |
| Diluted                                                 |  |                  | 40,256  |    |  |   | 33,737  |    |  |   | 2,510   |    |
|                                                         |

Seeaccompanying notes.

53

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Primus Guaranty, Ltd. ConsolidatedStatements of Shareholders' Equity(dollars in000s)

|                                               |  |                       |          |         |  |        |         |         |  |        |         |         |  |  |
|-----------------------------------------------|--|-----------------------|----------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                          |  | YearEnded December31, |
|                                          |  | 2004                  |          | 2003    |  | 2002   |
| **Commonstock**                               |  |                  |     |    |  |   |    |    |  |
| Balance at beginning ofyear                   |  | $                     | 230      |    |  | $      | 208     |    |  | $      | 240     |    |
| Conversionof warrants to commonstock          |  |                  | 85       |    |  |   | — |    |  |   | — |    |
| Sharesissued to corporatesponsor              |  |                  | —  |    |  |   | — |    |  |   | 99      |    |
| Sharesrepurchased andretired                  |  |                  | —  |    |  |   | (1      | )  |  |   | (146    | )  |
| Sharesvested under employee compensationplans |  |                  | 91       |    |  |   | 23      |    |  |   | 15      |    |
| Shares issuedin Initial PublicOffering        |  |                  | 731      |    |  |   | — |    |  |   | — |    |
| Conversionof Series A preferredstock          |  |                  | 2,398    |    |  |   | — |    |  |   | — |    |
| Balanceat end ofyear                          |  |                  | 3,535    |    |  |   | 230     |    |  |   | 208     |    |
|                                          |  |                  |     |    |  |   |    |    |  |
| Additionalpaid-in-capital                     |  |                  |     |    |  |   |    |    |  |
| Balance atbeginning ofyear                    |  |                  | 1,325    |    |  |   | 211     |    |  |   | — |    |
| Conversionof warrants to commonstock          |  |                  | 5,875    |    |  |   | — |    |  |   | — |    |
| Sharesrepurchased andretired                  |  |                  | —  |    |  |   | (10     | )  |  |   | — |    |
| Sharesvested under employee compensationplans |  |                  | 6,140    |    |  |   | 1,124   |    |  |   | 211     |    |
| Sharesissued in Initial PublicOffering        |  |                  | 110,010  |    |  |   | — |    |  |   | — |    |
| Conversionof Series A preferredstock          |  |                  | 141,510  |    |  |   | — |    |  |   | — |    |
| Balanceat end ofyear                          |  |                  | 264,860  |    |  |   | 1,325   |    |  |   | 211     |    |
|                                          |  |
| ConvertiblePreferred stock                    |  |                  |     |    |  |
| Balance at beginning ofyear                   |  |                  | 143,908  |    |  |   | 143,908 |    |  |   | 12      |    |
| SeriesBretirement                             |  |                  | —  |    |  |   | — |    |  |   | (12     | )  |
| Proceedsfrom Series Aissuance                 |  |                  | —  |    |  |   | — |    |  |   | 143,908 |    |
| Conversionof Series A to commonstock          |  |                  | (143,908 | )  |  |   | — |    |  |   | — |    |
| Balanceat end ofyear                          |  |                  | —  |    |  |   | 143,908 |    |  |   | 143,908 |    |
|                                          |  |
| Warrants                                      |  |                  |     |    |  |   |    |    |  |
| Balanceat beginning ofyear                    |  |                  | 1,070    |    |  |   | 1,070   |    |  |   | — |    |
| Conversionof warrants to commonstock          |  |                  | (458     | )  |  |   | — |    |  |   | — |    |
| Proceedsfrom warrantsissuance                 |  |                  | —  |    |  |   | — |    |  |   | 1,070   |    |
| Balanceat end ofyear                          |  |                  | 612      |    |  |   | 1,070   |    |  |   | 1,070   |    |
|                                          |  |
| Retainedearnings (accumulateddeficit)         |  |                  |     |    |  |   |    |    |  |
| Balance at beginning ofyear                   |  |                  | 68,305   |    |  |   | (10,166 | )  |  |   | (7,097  | )  |
| Netincome(loss)                               |  |                  | 23,685   |    |  |   | 78,471  |    |  |   | (3,069  | )  |
| Balanceat end ofyear                          |  |                  | 91,990   |    |  |   | 68,305  |    |  |   | (10,166 | )  |
| Totalshareholders' equity at end ofyear       |  | $                     | 360,997  |    |  | $      | 214,838 |    |  | $      | 135,231 |    |
|                                               |

Seeaccompanying notes.

54

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Primus Guaranty, Ltd. ConsolidatedStatements of Cash Flows(dollars in 000s except per shareamounts)

|                                                                                                                                               |  |                       |          |         |  |        |         |         |  |        |         |         |  |  |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--|-----------------------|----------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                                                                                                          |  | YearEnded December31, |
|                                                                                                                                          |  | 2004                  |          | 2003    |  | 2002   |
| **Cashflows from operating activities**                                                                                                       |  |                  |     |    |  |
| Netincome(loss)                                                                                                                               |  | $                     | 23,685   |    |  | $      | 78,471  |    |  | $      | (3,069  | )  |
| Adjustmentsto reconcile net income (loss) to net cash provided by (used in)operating activities: Non-cash items included in net income(loss): |  |                  |     |    |  |   |    |    |  |
| Depreciation offixedassets                                                                                                                    |  |                  | 234      |    |  |   | 214     |    |  |   | 45      |    |
| Amortizationof internal use software costs                                                                                                    |  |                  | 1,717    |    |  |   | 5,617   |    |  |   | 1,803   |    |
| Stockcompensation                                                                                                                             |  |                  | 6,230    |    |  |   | 1,146   |    |  |   | 226     |    |
| Netunrealized (gain) loss on credit swapportfolio                                                                                             |  |                  | 268      |    |  |   | (46,739 | )  |  |   | 213     |    |
| Unrealized(gain) loss onsublease                                                                                                              |  |                  | (39      | )  |  |   | (22     | )  |  |   | 62      |    |
| Deferredrent                                                                                                                                  |  |                  | (18      | )  |  |   | 163     |    |  |   | 310     |    |
| Amortizationof debt issuancecosts                                                                                                             |  |                  | 14       |    |  |   | — |    |  |   | — |    |
| Distributionson preferred securities ofsubsidiary                                                                                             |  |                  | 2,138    |    |  |   | 1,854   |    |  |   | — |    |
| Increase(decrease) in cash resulting from changesin:                                                                                          |  |                  |     |    |  |
| Premiums receivable on creditswaps                                                                                                            |  |                  | (57      | )  |  |   | 196     |    |  |   | (336    | )  |
| Accruedpremiums on creditswaps                                                                                                                |  |                  | 293      |    |  |   | 728     |    |  |   | (4,370  | )  |
| Deferredcredit swappremiums                                                                                                                   |  |                  | (43      | )  |  |   | 112     |    |  |   | — |    |
| Accountreceivable -sublease                                                                                                                   |  |                  | —  |    |  |   | 9       |    |  |   | (9      | )  |
| Deferredfinancial guaranteepremiums                                                                                                           |  |                  | (395     | )  |  |   | 1,201   |    |  |   | — |    |
| Brokeragefeespayable                                                                                                                          |  |                  | (36      | )  |  |   | (14     | )  |  |   | 64      |    |
| Accruedinterestreceivable                                                                                                                     |  |                  | (1,252   | )  |  |   | 55      |    |  |   | (185    | )  |
| Prepaidexcess-of-loss insurance policypremium                                                                                                 |  |                  | —  |    |  |   | 618     |    |  |   | 1,854   |    |
| Premiumsreceivable on financialguarantees                                                                                                     |  |                  | 401      |    |  |   | (1,201  | )  |  |   | — |    |
| Prepaidexpenses                                                                                                                               |  |                  | (473     | )  |  |   | (53     | )  |  |   | — |    |
| Assetmanagement feereceivable                                                                                                                 |  |                  | (15      | )  |  |   | — |    |  |   | — |    |
| Incometaxreceivable                                                                                                                           |  |                  | (10      | )  |  |   | (269    | )  |  |   | — |    |
| Accountspayable                                                                                                                               |  |                  | 251      |    |  |   | (60     | )  |  |   | (8,841  | )  |
| Compensationpayable                                                                                                                           |  |                  | (157     | )  |  |   | 1,686   |    |  |   | 3,788   |    |
| Interestpayable                                                                                                                               |  |                  | 364      |    |  |   | — |    |  |   | — |    |
| Currentstate and local taxespayable.                                                                                                          |  |                  | 12       |    |  |   | (254    | )  |  |   | 254     |    |
| Netcash provided by (used in) operatingactivities                                                                                             |  |                  | 33,112   |    |  |   | 43,458  |    |  |   | (8,191  | )  |
| **Cashflows from investingactivities**                                                                                                        |  |                  |     |    |  |   |    |    |  |
| Fixed assetpurchases.                                                                                                                         |  |                  | (383     | )  |  |   | (92     | )  |  |   | (1,818  | )  |
| Netpurchase of short-terminvestments.                                                                                                         |  |                  | (157,133 | )  |  |   | (3,968  | )  |  |   | — |    |
| Developmentand purchase of internal usesoftware                                                                                               |  |                  | (541     | )  |  |   | (541    | )  |  |   | (12,351 | )  |
| Netcash used in investingactivities                                                                                                           |  |                  | (158,057 | )  |  |   | (4,601  | )  |  |   | (14,169 | )  |
| **Cashflows from financingactivities**                                                                                                        |  |                  |     |    |  |
| Proceeds from preferredsecurity and warrantsissuance                                                                                          |  |                  | —  |    |  |   | — |    |  |   | 144,678 |    |
| Proceedsfrom preferred security issuance ofsubsidiary                                                                                         |  |                  | —  |    |  |   | — |    |  |   | 98,521  |    |
| Proceedsfrom issuance of commonshares                                                                                                         |  |                  | 110,743  |    |  |   | — |    |  |   | — |    |
| Repurchaseand retirement of stock                                                                                                             |  |                  | —  |    |  |   | (11     | )  |  |   | — |    |
| Proceedsfrom exercise ofwarrants                                                                                                              |  |                  | 5,500    |    |  |   | — |    |  |   | — |    |
| Proceedsfrom issuance of subordinateddebt                                                                                                     |  |                  | 75,000   |    |  |   | — |    |  |   | — |    |
| Debtissuancecosts                                                                                                                             |  |                  | (1,139   | )  |  |   | — |    |  |   | — |    |
| Netpreferred distributions ofsubsidiary                                                                                                       |  |                  | (2,138   | )  |  |   | (1,854  | )  |  |   | — |    |
| Netcash provided by (used in) financingactivities                                                                                             |  |                  | 187,967  |    |  |   | (1,865  | )  |  |   | 243,199 |    |
| Netincrease incash                                                                                                                            |  |                  | 63,022   |    |  |   | 36,992  |    |  |   | 220,839 |    |
| Cashand cash equivalents at beginning ofyear                                                                                                  |  |                  | 257,967  |    |  |   | 220,975 |    |  |   | 136     |    |
| Cashand cash equivalents at end ofyear                                                                                                        |  | $                     | 320,989  |    |  | $      | 257,967 |    |  | $      | 220,975 |    |
| **Supplementaldisclosures**                                                                                                                   |  |                  |     |    |  |   |    |    |  |
| Cash paid forinterest                                                                                                                         |  | $                     | 503      |    |  | $      | — |    |  | $      | — |    |
| Cashpaid fortaxes                                                                                                                             |  |                  | 44       |    |  |   | 347     |    |  |   | — |    |
|                                                                                                                                               |

Seeaccompanying notes.

55

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatementsDecember 31,2004

1.    Organization

Primus Guaranty, Ltd. ("PrimusGuaranty" or the "Company"), isa Bermuda holding company, and the 100% owner of Primus Bermuda,Ltd. ("Primus Bermuda"), a Bermuda holdingcompany. Primus Bermuda, originally Primus Barbados, Ltd., wasre-domiciled in Bermuda in December 2004. Primus Bermuda is the100% owner of Primus Group Holdings, LLC ("PrimusGroup Holdings"), a Delaware limited liability company.Primus Group Holdings has two principal operating subsidiaries, PrimusFinancial Products, LLC ("Primus Financial"),and Primus Asset Management, Inc. ("Primus AssetManagement"). Primus Financial is a Delaware financialproducts limited liability company that maintains a long-termcounterparty credit rating of AAA from Standard & Poor's("S&P") and Aaa from Moody'sInvestors Service, Inc. ("Moody's" and,together with S&P, the "RatingAgencies"). The Company considers its legal domicile to bewhere it is incorporated, Bermuda. Primus Financial is primarily aprovider of credit risk protection in the form of credit swaps coveringsingle name, investment grade corporate and sovereign financialobligations. Primus Financial is also permitted to sell credit swapsreferencing portfolios containing obligations of multiple referenceentities. Primus Asset Management is a provider of administrative andtechnology support to Primus Financial and an asset manager for PrimusFinancial and third parties.

Primus Financial and Primus AssetManagement function as separate entities from Primus Group Holdings.Additionally, the obligations of Primus Guaranty are not theobligations of Primus Bermuda, Primus Group Holdings, or any other ofits affiliates, and vice versa. Primus Asset Management wholly ownsPrimus Re, Ltd. ("Primus Re"), a Bermudacompany that operates as a financial guaranty insurance company and islicensed as a Class 3 Insurer under the Insurance Act of 1978 ofBermuda.

Prior to March 14, 2002, Primus Guaranty and itssubsidiaries were in the development stage. On March 14, 2002, theCompany raised $144.9 million in proceeds (net of issuance expenses)through the sale of Series A Preferred Stock, of which $122.5 millionwas contributed to Primus Corporate Services, Inc.("Primus Corporate"), at that time the parentcompany of Primus Financial and Primus Re and now known as Primus GroupHoldings. Primus Corporate contributed $109 million to Primus Financialas common stock. Primus Financial began selling credit swaps on June 7,2002. On May 22, 2002, Primus Asset Management was created as part of areorganization of the Primus Guaranty corporate structure. At thattime, Primus Corporate transferred its assets and liabilities (exceptfor its investment in Primus Financial) to Primus Asset Management, andin return received all 1,000 authorized and issues shares of PrimusAsset Management.

2.    Summary of Significant AccountingPolicies

Basis of Presentation

The consolidatedfinancial statements include the accounts of Primus Guaranty and itssubsidiaries and are presented in accordance with U.S. generallyaccepted accounting principles. Significant intercompany transactionshave been eliminated in consolidation.

The consolidatedfinancial statements represent a single reportable segment, as definedin Statement of Financial Accounting Standards("SFAS") No. 131, Disclosures aboutSegments of an Enterprise and Related Information. During theperiod March 14, 2002 through June 30, 2004, Primus Asset Managementsupported only Primus Financial's activities; its third partyoperations in the second half of 2004 were not significant. Resultsfrom Primus Re's activities had no significant impact on theCompany's 2003 and 2004 results.

The consolidatedfinancial statements are presented in U.S. dollar equivalents. AtDecember 31, 2004, Primus Financial's credit swap activities wereconducted in U.S. dollars and Euros.

Certain 2003 and 2002amounts have been reclassified to be consistent with the 2004presentation.

56

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatements (Continued)December 31,2004

Use of Estimates

The preparationof financial statements in conformity with generally acceptedaccounting principles requires management to make estimates andassumptions that affect the amounts reported in the financialstatements and accompanying notes. Actual results could differ fromthose estimates. Management's estimates and assumptions are usedmainly in estimating the fair value of credit swaps and the deferredtax asset valuation.

Cash and Cash Equivalents

PrimusGuaranty defines cash equivalents as short term, highly liquidsecurities and interest earning deposits with original maturities ormaturities at time of purchase of 90 days or less.

Short-TermInvestments

Short-term investments are classified as availablefor sale by the Company and are securities with original maturities ormaturities at time of purchase ranging from 91 days to two years. Thesesecurities are recorded on the balance sheet at cost, whichapproximates fair value.

Interest Income

The Companyearns interest income on its cash and cash equivalents, includingcommercial paper and other securities, and on short-term investments,which include the accretion of discount and amortization of the premiumrecorded upon the acquisition of such securities.

CreditSwaps

Credit swaps are over-the-counter("OTC") derivative financial instruments andare recorded at fair value in accordance with SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities.Obtaining the fair value (as such term is defined in SFAS No. 133) forsuch instruments requires the use of management judgment. Theseinstruments are valued using pricing models based on the net presentvalue of expected future cash flows and observed prices for other OTCtransactions bearing similar risk characteristics. The fair value ofthese instruments appears on the consolidated statement of financialcondition as unrealized gains or losses on credit swaps. The Companydoes not believe that its credit swaps fall outside the scope of theguidance of SFAS No. 133 paragraph 10d, as amended by SFAS No. 149,Amendment of Statement 133 on Derivative Instruments and HedgingActivities, because there is no contractual requirement that theprotection purchaser be exposed to the underlying risk.

Netcredit swap revenue includes realized and unrealized gains and losseson credit swaps and net premiums earned.

Premiums are taken intoincome as they are earned over a specified time period. AccruedPremiums on credit swaps represent premiums earned but not yet payableby Primus Financial's counterparty. Premiums Receivable on creditswaps represents premiums that are both earned by and payable to PrimusFinancial.

Foreign Currency

Primus Financial begantransacting credit swaps denominated in Euros during February 2003.Assets and liabilities denominated in non-U.S. dollar currencies aretranslated into U.S. dollar equivalents using year-end spot foreignexchange rates. Gains and losses resulting from translation to U.S.dollar equivalents are reflected in foreign exchange revaluation on thestatement of operations for the year ended December 31, 2004. For theyear ended December 31, 2003, the foreign currency revaluation was notsignificant and is included in net credit swap revenue in our statementof operations.

57

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatements (Continued)December 31,2004

Financial Guarantee-InsuranceContracts

The Company has undertaken a limited amount offinancial guarantee business through its subsidiary Primus  Re.Financial guarantees are insurance contracts that contingently requirethe guarantor to make payments to the guaranteed party. The Companydesigns its guarantee contracts to qualify as non-derivatives inaccordance with the scope exception under paragraph 10d of SFAS 133 asamended by SFAS No. 149, Amendment of Statement 133 on DerivativeInstruments and Hedging Activities. This scope exception requiresthat the guaranteed party be exposed to loss both at inception and overthe life of the contract, and incurrence of loss must be preconditionsfor payment under the contract and that these losses are based onpayments to be made solely to reimburse the guaranteed party forfailure of the debtor to satisfy its required payment obligations undera nonderivative contract, either at pre-specified payment dates oraccelerated payment dates as a result of the occurrence of an event ofdefault (as defined in the financial obligation covered by theguarantee contract) or notice of acceleration being made to the debtorby the creditor. Thus, the Company accounts for its financial guaranteecontracts in accordance with SFAS No. 60, Accounting and Reportingby Insurance Enterprises. This requires that premiums are deferredand recognized over the life of the contract and that losses arerecorded in the period that they occur based on an estimate of theultimate cost of losses incurred.

The Company does not activelyoffer financial guarantee insurance. Rather, it is an alternative theCompany has available when a counterparty requests an insurancecontract instead of a credit swap. Generally, a counterparty'schoice of a financial guarantee insurance contract versus a credit swapis determined by economic terms available in the marketplace as well asregulatory and accounting considerations. Also, the purchaser of aninsurance contract cannot submit a claim for payment unless it has aninsurable loss, whereas the purchaser of a credit swap need not haveactual exposure to the underlying risk.

Insurance PremiumsEarned and Receivable and Related Expenses

In exchange forproviding financial guarantee protection to counterparties, Primus Rereceives premiums over the life of the contract. The amount expectedover the life of the policy is reflected in the statement of financialcondition and will be reduced as payments are received quarterly inadvance.

The accounts of Primus Re are not deemed to be separateaccounts under SOP 03-01, Accounting & Reporting by InsuranceEnterprises for Certain Nontraditional Long-Duration Contracts forSeparate Accounts, since investment performance is not passedthrough to the contract holder.

Policy acquisition costs includeonly those expenses that relate primarily to, and vary with, premiumproduction. Such costs generally include compensation of employeesinvolved in underwriting and policy issuance functions, certain ratingagency fees, state premium taxes and certain other underwritingexpenses. No costs have been deferred by the Company as of December 31,2004, as any such amounts have been immaterial.

DeferredFinancial Guarantee Premiums

Unearned premiums related to thefinancial guarantee protection provided are used to establish theliability at inception. This liability is reflected in income on astraight-line basis over the period the risk protection isprovided.

Unpaid Losses and Loss Expenses on FinancialGuarantees

Liabilities for unpaid losses and lossexpenses include the accumulation of individual case estimates forclaims reported as well as estimates of incurred but not reportedclaims and estimates of 

58

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatements (Continued)December 31,2004

loss settlement expenses on the obligationsit has insured. Estimates will be based upon historical industry lossexperience modified for current trends as well as prevailing economic,legal and social conditions. Any changes in estimates are reflected inoperating results in the period in which the estimates changed. AtDecember 31, 2004 and 2003, the Company had no loss reservesrecorded.

Property, Plant and Equipment

Fixed assetsare stated at cost less accumulated depreciation and amortization.Fixed assets include computer hardware, telephone equipment, furnitureand fixtures, and office equipment, which are depreciated using astraight-line method over the estimated useful lives of the assets, andleasehold improvements which are amortized using the straight-linemethod over the shorter of the lease term or estimated useful life.

Internal Use Software Costs

During the Company'sdevelopment stage, the Company had various aspects of its proprietarytechnology platform under applications development. The primaryapplications related to (1) the development of the capital models onwhich Primus Financial in part has its public ratings based, and (2)the transactional platform which maintains the records of eachtransaction, provides pricing and analytical support for PrimusFinancial's credit swap business, and provides additional supportin the form of automated documentation creation and financial datanecessary to run Primus Financial's business.

The softwareand related costs of developing the capital model and transactionalplatform were capitalized in accordance with AICPA Statement ofPosition (SOP) 98-1, Accounting for the Costs of Computer SoftwareDeveloped or Obtained for Internal Use. These costs are beingamortized over five years on a straight-line basis. During 2003, it wasdetermined that $3.2 million of certain assets were no longer necessaryfor the Company's business and were written off. These costs areincluded in "Fixed asset depreciation andamortization" in the consolidated statement of operations.Software development amounts expensed were $469 thousand, $487 thousandand $302 thousand for the years ended December 31, 2004, 2003 and 2002,respectively, as they did not qualify for capitalization.

Income Taxes

Income tax expense is computed in accordancewith the requirements of SFAS No. 109, Accounting for IncomeTaxes, which prescribes the asset and liability approach toaccounting for income taxes. The asset and liability approach requiresthe recognition of deferred tax liabilities and assets for the expectedfuture tax consequences of temporary differences between the carryingamounts and the tax bases of assets and liabilities.

EmployeeCompensation Plans

In 2003, the Company adopted the fair valueapproach on a prospective basis for recording stock-based employeecompensation in accordance with the fair value method prescribed bySFAS No. 123, Accounting for Stock-based Compensation,("SFAS 123"), as amended by SFAS No. 148,Accounting for Stock Based Compensation—Transition andDisclosure. Compensation expense is recognized based on the fairvalue of stock options, restricted shares and restricted share units("RSU") granted over the related vestingperiod. The fair value of the stock options granted is determinedthrough the use of an option-pricing model.

Prior to 2003, theCompany applied APB No. 25 "Accounting for Stock Issuedto Employees," and related Interpretations("APB 25") in accounting for its employeecompensation plans. Under APB 25, the fair market value of shares ofstock and RSUs awarded to employees are expensed by allocating theiraggregate grant date fair value over the vesting period. For stockoptions, compensation is measured as the excess, if any, of fair marketvalue of the stock over the exercise price at the date of grant.

59

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatements (Continued)December 31,2004

See "Recent AccountingPronouncement" for a discussion of SFAS 123R,"Share-Based Payment"("SFAS 123R"), which was issued in December2004.

Recent Accounting Pronouncements

In January 2003,the FASB issued Interpretation No. 46, or FIN 46,"Consolidation of Variable Interest Entities, anInterpretation of ARB No. 51." The Interpretationdefines "variable interests" and specifiesthe circumstances under which consolidation of special purpose entitieswill be dependent upon such interests. In December 2003, the FASBissued FASB Interpretation No. 46 (revised December 2003), or FIN 46R,which effectively modified and clarified certain provisions of FIN 46,as originally issued, and modified the effective date for certainentities.

The provisions of FIN 46, as revised, were adopted asof December 31, 2003, for our interests in all VIEs. The result was thederecognition of the MMP Receipts issued by the Trust and therecognition of the Primus Financial Cumulative Preferred Stock issuedby Primus Financial to the Trust. The adoption of FIN 46R had no impacton our financial statements.

In December 2004, the FASB issuedSFAS 123R, which replaces SFAS 123 and supersedes APB 25. SFAS 123Reliminates the choice of alternative accounting methods, and requiresthat all entities follow the fair value based method of SFAS 123.Public entities will be required to apply Statement 123R as of thefirst interim or annual reporting period that begins after June 15,2005. The adoption of SFAS 123R is not expected to have a significantimpact on our financial statements.

In December 2004, the FASBissued SFAS No. 153, "Exchanges of Nonmonetary Assets,an amendment of APB Opinion No. 29, Accounting for NonmonetaryTransactions". APB Opinion No. 29 is based on theprinciple that exchanges of nonmonetary assets should be measured basedon the fair value of the assets exchanged. The guidance in thatOpinion, however, included certain exceptions to that principle. ThisStatement amends Opinion 29 to eliminate the exception for nonmonetaryexchanges of similar productive assets and replaces it with a generalexception for exchanges of nonmonetary assets that do not havecommercial substance, that is, if the future cash flows of the entityare not expected to change significantly as a result of the exchange.The provisions of this statement are effective for nonmonetary assetexchanges occurring in fiscal periods beginning after June 15, 2005.The Company anticipates that SFAS 153 will not have an impact on ourfinancial statements.

3.    Initial Public Offering

Primus Guaranty completed an IPO on October 5, 2004, listing itsshares on the New York Stock Exchange, or, NYSE. The Company issued9,143,493 shares at a price $13.50. The proceeds to the Company were$110.7 million, net of the underwriting discount and offering expenses.Primus Guaranty has subsequently contributed $60.0 million of the IPOproceeds to Primus Financial to support the growth of its credit swapbusiness. Primus Guaranty has invested the remaining net proceeds inshort-term money market instruments, pending utilization in businessesrelated to the credit markets. The completion of the IPO caused theCompany to vest one-half of the remaining unvested stock, restrictedstock units and options held by employees at the date of the IPO. TheCompany recognized an expense of approximately $3.3 million in thefourth quarter of 2004 as a result of this accelerated vesting.

4.    Cash and Cash Equivalents

The Company and itssubsidiaries invest only in obligations of the United States of Americaor direct debt obligations of U.S. Agencies rated AAA and Aaa by therespective Rating Agencies, and commercial paper rated A-1 and P-1 bythe respective Rating Agencies.

60

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatements (Continued)December 31,2004

As of December 31, 2004 and 2003, theCompany's cash and cash equivalents include U.S. governmentagency obligations and money market funds. All outstanding obligationsmature within 90 days.

5.    Short-Term Investments

Short-term investments included obligations of the United States ofAmerica or direct debt obligations of U.S. Agencies rated AAA and Aaaby the respective Rating Agencies, which have original maturities ormaturities at time of purchase between 91 days and two years.

Asof December 31, 2004 and 2003, the Company's short-terminvestments consisted entirely of short-term U.S. government agencyobligations, which mature within two years.

6.    Primus ReFinancial Guarantee Transactions

On December 31, 2003, PrimusRe wrote three-year financial guarantee insurance policies on threeseparate reference entities. Primus Re then transferred all of its riskto Primus Financial through back-to-back credit swaps referencing thesame reference entities as the financial guarantee contracts and withthe same maturities. Any payments required to be made under thefinancial guarantee contracts to the insured will be covered by apayment received by Primus Re from Primus Financial. These credit swapsand the related effects on results of operations are eliminated inconsolidation. The aggregate notional amount of the credit swaps is$87.0 million at December 31, 2004. Primus Re's obligation to payon the insurance policies requires that (i) the insured suffers adefault, (ii) all premiums are paid up until the date that the insureddelivers a Notice of Payment to Primus Re and (iii) the Notice ofPayment is made to Primus Re in writing. The maximum payout under thethree guarantee insurance contracts would be $56.5 million. This amountis equal to the maximum amount receivable under the offsetting creditswaps, after deducting stipulated amounts representing the assumedrecoveries on reference entity obligations with a notional amount of$87.0 million.

7.    Credit Swap Revenues and Portfolio

Net credit swap revenue as presented in the consolidated statementof operations comprises changes in the fair value of credit swaps,realized gains or losses on the termination of credit swaps and premiumincome or expense. The realized gains and losses on credit swapsrepresent realized gains and losses on unwound or assigned creditswaps. The realization of gains or losses on credit swaps willgenerally result in a reduction in unrealized gains or losses andaccrued premium at the point in time realization occurs.

Inexchange for providing credit protection to its counterparties, PrimusFinancial receives premium payments as a series of fixed cash flows.Premiums are taken into income as they are earned over a specified timeperiod. Accrued premiums on credit swaps represent premiums earned butnot yet payable by Primus Financial's counterparty. Premiumsreceivable on credit swaps represents premiums that are both earned byand payable to Primus Financial. When Primus Financial purchases creditprotection from its counterparties, Primus Financial pays premiums as aseries of fixed cash flows. The premium expense is recognized ratablyover the life of the transaction as a component of net credit swaprevenue.

In accordance with accounting principles generallyaccepted in the United States, the Company carries its credit swaps onits balance sheet at their fair value. Changes in the fair value of theCompany's credit swap portfolio are recorded as unrealized gainsor losses in the Company's consolidated income statement. If acredit swap has an increase in fair value during a period, the increasewill add to the Company's net credit swap revenues for thatperiod. Conversely, if a credit swap has a decline in fair value duringthe period, the decline will subtract from the Company's net

61

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatements (Continued)December 31,2004

credit swap revenues for that period. Changesin the fair value of the Company's credit swap portfolio are afunction of the notional amount and composition of the portfolio andprevailing market credit swap premiums for comparable credit swaps. TheCompany generally holds the credit swaps it sells to maturity, at whichpoint, assuming no credit event has occurred, the cumulative unrealizedgains and losses on each credit swap would equal zero. In general, theCompany aggregates fair values of individual credit swaps bycounterparty for presentation on the Company's statement ofcondition. If the aggregate total of fair values for a counterparty isa net gain, the total is recorded as a component of unrealized gains oncredit swaps, at fair value in the statement of financial condition. Ifthe aggregate total of fair values for a counterparty is a net loss,the total is recorded as a component of unrealized losses on creditswaps, at fair value in the statement of financial condition.Aggregation by counterparty is applied where a valid ISDA masteragreement is in place with the counterparty, in instances where theCompany does not yet have a valid ISDA master agreement with thecounterparty, the fair values of individual swap transactions arerecorded as components of unrealized gains or losses on credit swaps,at fair value, dependent upon whether the individual contract was at again or a loss.

As a general rule, when the Company sells creditprotection, it intends to maintain the transaction until maturity.However, there are two sets of circumstances in which the Company couldelect to terminate transactions prior to maturity, and the Companymonitors its portfolio on a continuing basis to assess whether thosecircumstances are present.

First, whenever the Company receivesnew information suggesting that the credit quality of the underlyingrisk has deteriorated to a material degree, the Company considers thepossibility of terminating the transaction, usually at a loss, to avoidthe larger loss that could result if the credit swap were to remain inplace until a credit event occurs. The principal factor that governsthe Company's decision regarding termination in thesecircumstances is whether the Company believes that the underlying riskhas become substantially greater than the level of risk the Companywould choose to assume in entering into a new sale of credit defaultprotection.

Second, the Company may also elect to terminate atransaction for which it has an unrealized gain based on one or more ofthe following considerations: the likelihood of further gains arisingfrom the position, its view as to whether the capital dedicated to theposition would be profitably reallocated, its total exposure to aparticular Reference Entity, the total size of its portfolio inrelation to its capital and the total size of its swap positions andexposures with a particular counterparty which might be reduced so thatthe counterparty may enter into additional swaps with the Company.

The Company terminates (or offsets) a credit swap in any one ofthree ways. The Company may negotiate an agreed termination through theoriginal counterparty (an unwind). The Company may negotiate anassignment and novation of its rights and obligations under the creditswap to a third party (an assignment). As an alternative to terminatinga transaction, the Company may enter into an equal and oppositetransaction with a third party under which the Company purchases creditdefault protection on terms that match the terms of the originaltransaction (an offset). In this last case, both sides of the positionmay subsequently be unwound or assigned.

In the event of anunwind or assignment, the Company pays or receives a cash settlementnegotiated with the counterparty or assignee, based on the fair valueof the credit swap contract and the accrued premium on the swapcontract at the time of negotiation. The amounts the Company pays orreceives are recorded as a realization of fair value and as arealization of accrued premiums in the period in which the terminationoccurs.

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatements (Continued)December 31,2004

The tables below present the components ofcredit swap revenues for the years ended December 31, 2004, 2003 and2002. The Company distinguishes among credit swaps sold, credit swapspurchased as short-term investments and credit swaps purchased tooffset the credit risk on credit swaps previously sold.

Netcredit swap revenues for the year ended December 31, 2004 (inthousands)

|                                                                  |  |                        |        |               |  |                  |         |                                  |  |        |         |         |  |        |        |         |  |        |        |         |  |  |
|------------------------------------------------------------------|--|------------------------|--------|---------------|--|------------------|---------|----------------------------------|--|--------|---------|---------|--|--------|--------|---------|--|--------|--------|---------|--|--|
|                                                             |  | Premiumincome(expense) |        | Realizedgains |  | Realized(losses) |         | Changeinunrealizedgains/(losses) |  | Totals |
| Creditswapssold                                                  |  | $                      | 43,494 |          |  | $                | 5,533   |                             |  | $      | (1,139  | )  |  | $      | 1,899  |    |  | $      | 49,787 |    |
| Creditswaps purchased as short-terminvestments                   |  |                   | (927   | )        |  |             | 1,260   |                             |  |   | (132    | )  |  |   | (2,225 | )  |  |   | (2,024 | )  |
| Creditswaps purchased to offset credit risk on certain swapssold |  |                   | (92    | )        |  |             | — |                             |  |   | — |    |  |   | 58     |    |  |   | (34    | )  |
| Totals                                                           |  | $                      | 42,475 |          |  | $                | 6,793   |                             |  | $      | (1,271  | )  |  | $      | (268   | )  |  | $      | 47,729 |    |
|                                                                  |

Netcredit swap revenues for the year ended December 31, 2003 (inthousands)

|                                                                  |  |                        |        |               |  |                  |         |                                  |  |        |         |         |  |        |        |        |  |        |         |         |  |  |
|------------------------------------------------------------------|--|------------------------|--------|---------------|--|------------------|---------|----------------------------------|--|--------|---------|---------|--|--------|--------|--------|--|--------|---------|---------|--|--|
|                                                             |  | Premiumincome(expense) |        | Realizedgains |  | Realized(losses) |         | Changeinunrealizedgains/(losses) |  | Totals |
| Creditswapssold                                                  |  | $                      | 39,112 |          |  | $                | 18,313  |                             |  | $      | (264    | )  |  | $      | 46,663 |   |  | $      | 103,824 |    |
| Creditswaps purchased as short-terminvestments                   |  |                   | (19    | )        |  |             | 28      |                             |  |   | — |    |  |   | 23     |   |  |   | 32      |    |
| Creditswaps purchased to offset credit risk on certain swapssold |  |                   | (135   | )        |  |             | — |                             |  |   | (448    | )  |  |   | 53     |   |  |   | (530    | )  |
| Totals                                                           |  | $                      | 38,958 |          |  | $                | 18,341  |                             |  | $      | (712    | )  |  | $      | 46,739 |   |  | $      | 103,326 |    |
|                                                                  |

Netcredit swap revenues for the year ended December 31, 2002 (inthousands)

|                                                                  |  |                        |        |               |  |                  |         |                                  |  |        |         |         |  |        |      |         |  |        |        |         |  |  |
|------------------------------------------------------------------|--|------------------------|--------|---------------|--|------------------|---------|----------------------------------|--|--------|---------|---------|--|--------|------|---------|--|--------|--------|---------|--|--|
|                                                             |  | Premiumincome(expense) |        | Realizedgains |  | Realized(losses) |         | Changeinunrealizedgains/(losses) |  | Totals |
| Creditswapssold                                                  |  | $                      | 12,155 |          |  | $                | 3,145   |                             |  | $      | (302    | )  |  | $      | 105  |    |  | $      | 15,103 |    |
| Creditswaps purchased to offset credit risk on certain swapssold |  |                   | (24    | )        |  |             | — |                             |  |   | — |    |  |   | (318 | )  |  |   | (342   | )  |
| Totals                                                           |  | $                      | 12,131 |          |  | $                | 3,145   |                             |  | $      | (302    | )  |  | $      | (213 | )  |  | $      | 14,761 |    |
|                                                                  |

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatements (Continued)December 31,2004

The notional amount, fair value andaverage fair value of open credit swap transactions entered into withthird parties at December 31, 2004 and 2003 are as follows (inthousands):

|                           |  |            |            |        |  |        |           |        |  |  |
|---------------------------|--|------------|------------|--------|--|--------|-----------|--------|--|--|
|                      |  | December31 |
|                      |  | 2004       |            | 2003   |
| **CreditSwaps Sold**      |  |
| Gross notionalamount      |  | $          | 10,544,728 |   |  | $      | 6,291,375 |   |
| Fairvalue:                |  |
| Asset                     |  |       | 48,619     |   |  |   | 46,571    |   |
| Liability                 |  |       | 159        |   |  |   | 68        |   |
| Averagefairvalue:         |  |
| Asset                     |  |       | 34,131     |   |  |   | 11,193    |   |
| Liability                 |  |       | 432        |   |  |   | 635       |   |
| **CreditSwaps Purchased** |  |
| Gross notionalamount      |  | $          | 468,175    |   |  | $      | 130,000   |   |
| Fairvalue                 |  |
| Asset                     |  |       | 0          |   |  |   | 141       |   |
| Liability                 |  |       | 2,202      |   |  |   | 118       |   |
| Averagefairvalue          |  |
| Asset                     |  |       | 185        |   |  |   | 5         |   |
| Liability                 |  |       | 648        |   |  |   | 4         |   |
|                           |

"Asset"in the above table represents unrealized gains on credit swaps while"Liability" represents unrealized losses oncredit swaps. All credit swaps are subject to netting arrangements thathave been contractually established with each counterparty under anISDA Master Agreement. The notional amounts of the credit swapcontracts in the preceding table are presented on a gross basis and thefair values of such contracts are presented net by counterparty. Theaverage fair value in the above table was calculated on a daily basis.At December 31, 2004, Primus Financial had three derivativetransactions with its affiliate, Primus Re, totaling $87 million innotional principal.

Under the terms of Primus Financial'soperating guidelines, derivatives transactions can only include creditswaps. Credit swaps are derivative transactions that obligate one partyto the transaction (the "Seller") to pay anamount to the other party to the transaction (the"Buyer") should one of a specified group ofevents ("Credit Events") be incurred by anunrelated third party (the "ReferenceEntity") specified in the contract. The amount to be paidby the Seller will either be (a) the notional amount of thetransaction, in exchange for which the Seller must be delivered adefined obligation of the Reference Entity (called physicalsettlement), or (b) the difference between the current market value ofa defined obligation of the Reference Entity and the notional amount ofthe transaction (called cash settlement). In exchange for incurring thepotential of a Credit Event-generated loss, the Seller will receive afixed premium for the term of the contract (or until the occurrence ofa Credit Event). The fixed premium is generally paid quarterly inarrears over the term of the transaction.

All transactionsentered into between the Buyer and the Seller are subject to an ISDAMaster Agreement executed by both parties. The Master Agreement allowsfor the consolidation of the market exposures and termination of alltransactions between the Buyer and Seller in the event a Default (asdefined by the Master Agreement) is incurred by either party.

Primus Financial is primarily a Seller of credit swaps, although itmay also buy credit swaps to off-set the risks it has incurred as aSeller. Credit swaps purchased to off-set risks do not qualify ashedges in accordance with SFAS No. 133. In addition, Primus Financialis permitted to purchase credit swaps as a limited percentage of itsoverall portfolio (represented as Credit Swaps Purchased in the

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatements (Continued)December 31,2004

below tables). The company's operatingguidelines and board authorization limit the notional amount of creditswaps purchased to seven and a half percent of the notional amount ofcredit swaps sold, allowing Primus Financial to seek short term marketappreciation. The primary risks inherent in the Company'sactivities are (a) that Reference Entities specified in its credit swaptransactions will incur Credit Events (Credit Events may include any orall of the following: bankruptcy, failure to pay, repudiation ormoratorium, and modified or original restructuring) that will requirePrimus Financial to make payments to the Buyers of the transactions,(b) where Primus Financial is a Buyer of a credit swap and a CreditEvent occurs, the Seller fails to make payment to the Company, and (c)that Buyers of the transactions from Primus Financial will default ontheir required premium payments at times when the fair value of theunderlying transactions are positive to Primus Financial. During 2004,2003 and 2002, none of these events had occurred.

The tablesbelow summarize the notional amounts and fair value at risk toperformance by Reference Entities and Counterparties of credit swaptransactions, which are recorded at fair value (summarized by creditrating) as of December 31, 2004 and 2003. Fair Value is the fair valueof all transactions after consideration of offsetting exposures underMaster Agreements with counterparties.

Risk off-set transactionsare reflected in the below tables as part of Credit Swaps Sold. Thetotal notional amounts of risk off-set transactions were $5 million and$5 million during 2004 and 2003, respectively. Fair value of the riskoffset transactions equaled $(206) thousand and $(264) thousand atDecember 31, 2004 and 2003, respectively.

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatements (Continued)December 31,2004

(in thousands and U.S. dollarequivalent)

|                        |  |                |            |           |  |                |        |           |  |        |           |        |  |        |         |         |  |  |
|------------------------|--|----------------|------------|-----------|--|----------------|--------|-----------|--|--------|-----------|--------|--|--------|---------|---------|--|--|
|                   |  | December31     |
|                   |  | 2004           |            | 2003      |
| Moody'sRatingCategory  |  | NotionalAmount |            | FairValue |  | NotionalAmount |        | FairValue |
| ReferenceEntity        |  |
| Credit SwapsSold:      |  |
| Aaa                    |  | $              | 651,270    |      |  | $              | 866    |      |  | $      | 405,500   |   |  | $      | 1,680   |    |
| Aa                     |  |           | 1,917,131  |      |  |           | 5,609  |      |  |   | 1,002,640 |   |  |   | 6,492   |    |
| A                      |  |           | 4,310,452  |      |  |           | 22,511 |      |  |   | 2,940,208 |   |  |   | 23,208  |    |
| Baa                    |  |           | 3,642,330  |      |  |           | 19,295 |      |  |   | 1,943,027 |   |  |   | 15,123  |    |
| Ba                     |  |           | 23,545     |      |  |           | 179    |      |  |   | —   |   |  |   | — |    |
| Total                  |  | $              | 10,544,728 |      |  | $              | 48,460 |      |  | $      | 6,291,375 |   |  | $      | 46,503  |    |
| CreditSwapsPurchased:  |  |
| Aaa                    |  | $              | 47,090     |      |  | $              | (158   | )    |  | $      | 20,000    |   |  | $      | (51     | )  |
| Aa                     |  |           | 13,545     |      |  |           | (44    | )    |  |   | —   |   |  |   | — |    |
| A                      |  |           | 209,815    |      |  |           | (803   | )    |  |   | 70,000    |   |  |   | (16     | )  |
| Baa                    |  |           | 160,635    |      |  |           | (969   | )    |  |   | 40,000    |   |  |   | 90      |    |
| NR                     |  |           | 37,090     |      |  |           | (228   | )    |  |   | —   |   |  |   | — |    |
| Total                  |  | $              | 468,175    |      |  | $              | (2,202 | )    |  | $      | 130,000   |   |  | $      | 23      |    |
| CounterpartyBuyer      |  |
| Credit SwapsSold:      |  |
| Aaa                    |  | $              | 5,000      |      |  | $              | 49     |      |  | $      | 12,000    |   |  | $      | 41      |    |
| Aa                     |  |           | 8,304,867  |      |  |           | 35,922 |      |  |   | 4,529,351 |   |  |   | 33,039  |    |
| A                      |  |           | 2,234,861  |      |  |           | 12,489 |      |  |   | 1,750,024 |   |  |   | 13,423  |    |
| Total                  |  | $              | 10,544,728 |      |  | $              | 48,460 |      |  | $      | 6,291,375 |   |  | $      | 46,503  |    |
| **CounterpartySeller** |  |
| Credit SwapsPurchased: |  |
| Aa                     |  | $              | 387,858    |      |  | $              | (1,699 | )    |  | $      | 75,000    |   |  | $      | 41      |    |
| A                      |  |           | 80,317     |      |  |           | (503   | )    |  |   | 55,000    |   |  |   | (18     | )  |
| Total                  |  | $              | 468,175    |      |  | $              | (2,202 | )    |  | $      | 130,000   |   |  | $      | 23      |    |
|                        |

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatements (Continued)December 31,2004

|                        |  |                |            |           |  |                |        |           |  |        |           |        |  |        |         |         |  |  |
|------------------------|--|----------------|------------|-----------|--|----------------|--------|-----------|--|--------|-----------|--------|--|--------|---------|---------|--|--|
|                   |  | December31     |
|                   |  | 2004           |            | 2003      |
| S&PRatingCategory  |  | NotionalAmount |            | FairValue |  | NotionalAmount |        | FairValue |
| **ReferenceEntity**    |  |
| Credit SwapsSold:      |  |
| AAA                    |  | $              | 627,725    |      |  | $              | 822    |      |  | $      | 395,500   |   |  | $      | 1,634   |    |
| AA                     |  |           | 1,826,628  |      |  |           | 4,462  |      |  |   | 931,156   |   |  |   | 5,648   |    |
| A                      |  |           | 4,863,204  |      |  |           | 25,569 |      |  |   | 3,202,996 |   |  |   | 24,792  |    |
| BBB                    |  |           | 3,217,171  |      |  |           | 17,536 |      |  |   | 1,761,723 |   |  |   | 14,429  |    |
| BB                     |  |           | 10,000     |      |  |           | 71     |      |  |   | —   |   |  |   | — |    |
| Total                  |  | $              | 10,544,728 |      |  | $              | 48,460 |      |  | $      | 6,291,375 |   |  | $      | 46,503  |    |
| CreditSwapsPurchased:  |  |
| AAA                    |  | $              | 57,090     |      |  | $              | (198   | )    |  | $      | 20,000    |   |  | $      | (51     | )  |
| AA                     |  |           | 27,090     |      |  |           | (109   | )    |  |   | —   |   |  |   | — |    |
| A                      |  |           | 216,270    |      |  |           | (940   | )    |  |   | 75,000    |   |  |   | (3      | )  |
| BBB                    |  |           | 167,725    |      |  |           | (955   | )    |  |   | 35,000    |   |  |   | 77      |    |
| Total                  |  | $              | 468,175    |      |  | $              | (2,202 | )    |  | $      | 130,000   |   |  | $      | 23      |    |
| **CounterpartyBuyer**  |  |
| Credit SwapsSold:      |  |
| AAA                    |  | $              | 5,000      |      |  | $              | 49     |      |  | $      | 12,000    |   |  | $      | 41      |    |
| AA                     |  |           | 6,643,559  |      |  |           | 27,941 |      |  |   | 3,191,325 |   |  |   | 21,729  |    |
| A                      |  |           | 3,896,169  |      |  |           | 20,470 |      |  |   | 3,088,050 |   |  |   | 24,733  |    |
| Total                  |  | $              | 10,544,728 |      |  | $              | 48,460 |      |  | $      | 6,291,375 |   |  | $      | 46,503  |    |
| **CounterpartySeller** |  |
| Credit SwapsPurchased: |  |
| AA                     |  | $              | 290,768    |      |  | $              | (1,433 | )    |  | $      | 70,000    |   |  | $      | 40      |    |
| A                      |  |           | 177,407    |      |  |           | (769   | )    |  |   | 60,000    |   |  |   | (17     | )  |
| Total                  |  | $              | 468,175    |      |  | $              | (2,202 | )    |  | $      | 130,000   |   |  | $      | 23      |    |
|                        |

PrimusFinancial's operating guidelines impose various limits on thegeographical concentration of its business based on the country ofdomicile of each Reference Entity. Additionally, PrimusFinancial's counterparties are global financial institutions withwhom it has entered into Master Agreements that consolidate thecounterparty risk to one office of that counterparty. For the yearended December 31, 2004, three counterparties each generated greaterthan ten percent of the Company's total premium revenue. For theyear ended December 31, 2003, five counterparties each generatedgreater than ten percent of the Company's total premiumrevenue.

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatements (Continued)December 31,2004

The table below shows the geographicaldistribution of Primus Guaranty's credit swap portfolio bydomicile of the Reference Entity and domicile of the counterparty (inthousands and U.S. dollar equivalent):

|                           |  |                |            |            |  |                |         |            |  |        |           |        |  |        |         |         |  |  |
|---------------------------|--|----------------|------------|------------|--|----------------|---------|------------|--|--------|-----------|--------|--|--------|---------|---------|--|--|
|                      |  | December31     |
|                      |  | 2004           |            | 2003       |
| Countryof Domicile        |  | NotionalAmount |            | Fair Value |  | NotionalAmount |         | Fair Value |
| **CreditSwaps Sold**      |  |
| By ReferenceEntity:       |  |
| U.S.                      |  | $              | 5,262,363  |       |  | $              | 26,899  |       |  | $      | 3,503,500 |   |  | $      | 27,258  |    |
| OtherG-7countries         |  |           | 3,478,284  |       |  |           | 14,962  |       |  |   | 1,999,503 |   |  |   | 13,965  |    |
| OtherEurope               |  |           | 1,525,081  |       |  |           | 5,301   |       |  |   | 676,372   |   |  |   | 4,188   |    |
| Bermuda                   |  |           | 74,000     |       |  |           | 380     |       |  |   | 37,000    |   |  |   | 217     |    |
| Others                    |  |           | 205,000    |       |  |           | 918     |       |  |   | 75,000    |   |  |   | 875     |    |
| Total                     |  | $              | 10,544,728 |       |  | $              | 48,460  |       |  | $      | 6,291,375 |   |  | $      | 46,503  |    |
| ByCounterparty:           |  |
| U.S.                      |  | $              | 5,243,169  |       |  | $              | 22,797  |       |  | $      | 2,948,842 |   |  | $      | 20,952  |    |
| OtherG-7countries         |  |           | 3,049,740  |       |  |           | 15,146  |       |  |   | 1,731,418 |   |  |   | 14,975  |    |
| OtherEurope               |  |           | 2,189,819  |       |  |           | 10,313  |       |  |   | 1,611,115 |   |  |   | 10,576  |    |
| Others                    |  |           | 62,000     |       |  |           | 204     |       |  |   | —   |   |  |   | — |    |
| Total                     |  | $              | 10,544,728 |       |  | $              | 48,460  |       |  | $      | 6,291,375 |   |  | $      | 46,503  |    |
| **CreditSwaps Purchased** |  |
| By ReferenceEntity:       |  |
| U.S.                      |  | $              | 265,000    |       |  | $              | (1,282  | )     |  | $      | 115,000   |   |  | $      | 45      |    |
| OtherG-7countries         |  |           | 162,540    |       |  |           | (828    | )     |  |   | —   |   |  |   | — |    |
| OtherEurope               |  |           | 40,635     |       |  |           | (92     | )     |  |   | 10,000    |   |  |   | 4       |    |
| Others                    |  |           | —    |       |  |           | — |       |  |   | 5,000     |   |  |   | (26     | )  |
| Total                     |  | $              | 468,175    |       |  | $              | (2,202  | )     |  | $      | 130,000   |   |  | $      | 23      |    |
| ByCounterparty:           |  |
| U.S.                      |  | $              | 215,635    |       |  | $              | (935    | )     |  | $      | 75,000    |   |  | $      | (60     | )  |
| OtherG-7countries         |  |           | 185,450    |       |  |           | (879    | )     |  |   | 35,000    |   |  |   | 121     |    |
| OtherEurope               |  |           | 47,090     |       |  |           | (231    | )     |  |   | 20,000    |   |  |   | (38     | )  |
| Others                    |  |           | 20,000     |       |  |           | (157    | )     |  |   | —   |   |  |   | — |    |
| Total                     |  | $              | 468,175    |       |  | $              | (2,202  | )     |  | $      | 130,000   |   |  | $      | 23      |    |
|                           |

68

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PrimusGuaranty, Ltd.Notes to Consolidated FinancialStatements (Continued)December 31,2004

The table below shows the distribution ofPrimus Guaranty's credit swap portfolio by year of maturity forDecember 31, 2004 and 2003 (in thousands and U.S. dollarequivalent):

|                           |  |                |            |                        |  |                |         |                        |  |        |           |        |  |        |         |         |  |  |
|---------------------------|--|----------------|------------|------------------------|--|----------------|---------|------------------------|--|--------|-----------|--------|--|--------|---------|---------|--|--|
|                      |  | December31     |
|                      |  | 2004           |            | 2003                   |
|                      |  | NotionalAmount |            | FairValueofTransaction |  | NotionalAmount |         | FairValueofTransaction |
| **CreditSwaps Sold**      |  |
| Year ofMaturity           |  |
| 2004                      |  | $              | —    |                   |  | $              | — |                   |  | $      | 1,311,898 |   |  | $      | 2,200   |    |
| 2005                      |  |           | 2,841,441  |                   |  |           | 3,859   |                   |  |   | 1,227,169 |   |  |   | 5,807   |    |
| 2006                      |  |           | 1,014,554  |                   |  |           | 1,340   |                   |  |   | 270,640   |   |  |   | 1,272   |    |
| 2007                      |  |           | 2,583,503  |                   |  |           | 20,442  |                   |  |   | 2,197,580 |   |  |   | 26,243  |    |
| 2008                      |  |           | 1,184,157  |                   |  |           | 11,427  |                   |  |   | 1,257,798 |   |  |   | 11,060  |    |
| 2009                      |  |           | 2,901,073  |                   |  |           | 11,423  |                   |  |   | 26,290    |   |  |   | (79     | )  |
| 2010                      |  |           | 20,000     |                   |  |           | (31     | )                 |  |   | —   |   |  |   | — |    |
| Total                     |  | $              | 10,544,728 |                   |  | $              | 48,460  |                   |  | $      | 6,291,375 |   |  | $      | 46,503  |    |
| **CreditSwaps Purchased** |  |
| Year ofMaturity           |  |
| 2007                      |  | $              | 10,000     |                   |  | $              | (43     | )                 |  | $      | 60,000    |   |  | $      | — |    |
| 2008                      |  |           | 15,000     |                   |  |           | (21     | )                 |  |   | 60,000    |   |  |   | 35      |    |
| 2009                      |  |           | 443,175    |                   |  |           | (2,138  | )                 |  |   | 10,000    |   |  |   | (12     | )  |
| Total                     |  | $              | 468,175    |                   |  | $              | (2,202  | )                 |  | $      | 130,000   |   |  | $      | 23      |    |
|                           |

8.    FixedAssets

Fixed assets include computer hardware, telephoneequipment, furniture and fixtures, and office equipment, which aredepreciated using a straight-line method over the estimated usefullives of five years, and leasehold improvements which are amortizedusing the straight-line method over the shorter of the lease term orestimated useful life of ten years. At December 31, 2004 and 2003,fixed assets consist of the following (in thousands):

|                                              |  |            |       |        |  |        |       |        |  |  |
|----------------------------------------------|--|------------|-------|--------|--|--------|-------|--------|--|--|
|                                         |  | December31 |
|                                         |  | 2004       |       | 2003   |
| **Assetcategory**                            |  |
| Furniture andfixtures                        |  | $          | 487   |   |  | $      | 382   |   |
| Computers                                    |  |       | 131   |   |  |   | 92    |   |
| Officeequipment                              |  |       | 50    |   |  |   | 50    |   |
| Telephones                                   |  |       | 114   |   |  |   | 113   |   |
| Leaseholdimprovements                        |  |       | 1,510 |   |  |   | 1,273 |   |
|                                         |  |       | 2,292 |   |  |   | 1,910 |   |
| Lessaccumulated depreciation andamortization |  |       | 493   |   |  |   | 259   |   |
| Totalfixedassets                             |  | $          | 1,799 |   |  | $      | 1,651 |   |
|                                              |

Forthe years ended December 31, 2004 and 2003, the Company incurred $234thousand and $214 thousand of depreciation expense on the above assets,respectively.

69

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PrimusGuaranty, Ltd.Notes to Consolidated Financial Statements(Continued)December 31, 2004

9.    Long Term Debt of Subsidiary

Primus Financialissued $75.0 million of subordinated deferrable interest notes on July23, 2004 that mature in July 2034. The notes are subordinated in rightof payment to the prior payment in full of all existing and futuresenior indebtedness of the company, including counterparty claims. Thenotes are redeemable at the option of Primus Financial, in whole or inpart, on any auction date, at a redemption price equal to 100%of the principal amount of the notes to be redeemed, plus any accruedand unpaid interest thereon to the redemption date. The interest rateon the notes was fixed on the issue date at a rate of 2.57%(LIBOR plus 20 basis points) for a period of one year. Interest waspayable (i) on October 25, 2004 and January 25, 2005, and is payable onApril 25, 2005, and July 25, 2005, (ii) for each subsequent28-day period based on an auction rate set on the prior business dayand (iii) for each subsequent special rate period, on each date sodesignated by the company after electing such rate period, providedthat if the period is one year or longer, interest shall be payable atleast quarterly. The Company incurred interest expense of $867 thousandon these subordinated notes for the year ended December 31, 2004. AtDecember 31, 2004, the carrying value of the subordinated notesapproximates fair value.

Costs associated with the issuance ofthis debt were $1.1 million and are included in the Company'sconsolidated statement of financial condition as debt issuance costs,and amortized over the life of the debt. Amortization of debt issuancecosts is included in interest expense in our consolidated statement ofoperations.

10.    Income taxes

Primus Guaranty is aBermuda company. Primus Guaranty believes that it is not involved inthe active conduct of a trade or business in the U.S. For U.S. taxpurposes, Primus Guaranty will be treated either as a controlledforeign corporation or as a passive foreign investment company by itsU.S. shareholders. As such, Primus Guaranty has not provided for anyfederal or state and local income taxes in its separate financialstatements. However, on a consolidated basis, it has provided forincome taxes for certain of its subsidiaries, which are describedbelow. Primus Guaranty was incorporated in Bermuda to domicile itselfin a jurisdiction that is internationally recognized as a base forfinancial companies and in a jurisdiction that has an efficient andpredictable corporate tax regime.

For U.S. tax purposes, PrimusBermuda, originally Primus (Barbados) Ltd., will be treated either as acontrolled foreign corporation or as a passive foreign investmentcompany by its U.S. shareholders. Primus Bermuda was interposed betweenPrimus Guaranty and Primus Group Holdings because Barbados had a taxtreaty with the United States and Bermuda has no relevant tax treaty.The Barbados tax treaty, however, was recently amended. Therefore, asof December 31, 2004, we redomiciled Primus (Barbados), Ltd. as Primus(Bermuda), Ltd., or Primus Bermuda, in Bermuda.

Primus Guarantydoes not have any full time employees in, nor does the Company lease orown any real property in, Bermuda or Barbados.

From July 16,1999 through May 21, 2002, Primus Financial's predecessor, PrimusFinancial Products, Inc. (the "Corporation"),was a corporation for U.S. tax purposes and for the period from March14, 2002 through May 21, 2002, earned interest income of $349 thousand,on which federal, state, and local taxes of approximately $188 thousandwere payable.

As of May 22, 2002, the Corporation was convertedto Primus Financial, a limited liability company organized underDelaware law, and its parent was also converted to a limited liabilitycompany organized under Delaware law, with all of the interests in itsparent being held by Primus Bermuda, a non-US corporation. As a result,from May 22, 2002 through December 17, 2002, Primus Financial wastreated as a "disregarded entity" for U.S.tax purposes, and the results of its operations were treated as theoperations of a branch of its foreign parent corporation, PrimusBermuda. As a 

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PrimusGuaranty, Ltd.Notes to Consolidated Financial Statements(Continued)December 31, 2004

disregarded entity, Primus Financial was notitself subject to U.S. net income taxation. In addition, because PrimusFinancial's activities in the U.S. were confined to holdinginvestments in debt instruments and credit swaps for its own account,Primus Financial believes that its activities fall within theprovisions of Internal Revenue Code ("IRC")Section 864(b) and therefore does not believe that Primus Bermuda, anon-U.S. corporation, should be subject to taxation in the U.S. on anet income basis as a result of its interest in Primus Financial.Accordingly, Primus Financial did not provide for any income taxes inits financial statements for this period.

If the activities ofPrimus Financial, and thus Primus Bermuda, were found to fall outsidethe provisions of IRC Section 864(b), and Primus Financial, and thusPrimus Bermuda, were found to be subject to U.S. federal, state andlocal corporate income tax, it is difficult to predict the exacttreatment that would apply to Primus Bermuda and, therefore, toestimate the resulting income tax expense. However, were Primus Bermudato be subject to income tax, at a combined U.S. federal, New York Stateand New York City corporate income tax rate of 46%, on its GAAPincome, then its income tax expense (excluding interest and penalties)would have been approximately $13.1 million for 2004, $37.0 million for2003 and $80,000 for 2002. These figures assume that Primus Financialis not deemed to be making distributions to Primus Bermuda; suchdistributions would subject Primus Bermuda to an additional U.S.federal branch profits tax.

As of December 19, 2002, PrimusFinancial issued a second class of equity interests (the PreferredStock issuance discussed in Note 11), and as a result Primus Financialwas treated as a partnership for U.S. income tax purposes for theperiod from December 19, 2002 onward. All of Primus Financial'sitems of taxable income and expense flow through to itsinterest-holders for U.S. federal income tax purposes and any taxesthat may be attributable to such items are the responsibility of theinterest-holders. Based on the application of the provisions of IRCSection 864(b) and the investment nature of its operations, PrimusFinancial continues to believe that Primus Bermuda, a non-U.S.corporation, will not be subject to U.S. net income taxes with respectto its interest in Primus Financial.

Primus Asset Management hasentered into a Services Agreement with Primus Financial, whereby PrimusAsset Management provides services to Primus Financial includingmanagement, consulting and information technology. Since Primus AssetManagement is a U.S. domiciled corporation it is subject to U.S. incometaxes and income taxes of other taxing jurisdictions on fees receivedfrom Primus Financial.

The significant components of theconsolidated (provision)/ benefit for income taxes for the years endedDecember 31, 2004, 2003 and 2002 were as follows:

|                                          |  |            |         |         |  |        |         |         |  |        |         |         |  |  |
|------------------------------------------|--|------------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
| (inthousands)                            |  |
|                                     |  | December31 |
|                                     |  | 2004       |         | 2003    |  | 2002   |
| Current:                                 |  |
| Federal                                  |  | $          | — |    |  | $      | 252     |    |  | $      | (157    | )  |
| State/City                               |  |       | (46     | )  |  |   | (80     | )  |  |   | (97     | )  |
| Totalcurrent                             |  |       | (46     | )  |  |   | 172     |    |  |   | (254    | )  |
|                                     |  |       |    |    |  |
| Deferred:                                |  |
| Federal                                  |  |       | — |    |  |   | — |    |  |   | — |    |
| State/City                               |  |       | — |    |  |   | — |    |  |   | — |    |
| Totaldeferred                            |  |       | — |    |  |   | — |    |  |   | — |    |
| Total(provision)/benefit for incometaxes |  | $          | (46     | )  |  | $      | 172     |    |  | $      | (254    | )  |
|                                          |

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PrimusGuaranty, Ltd.Notes to Consolidated Financial Statements(Continued)December 31, 2004

The Company's effective tax ratediffers from the Bermudian federal statutory rate of zero percentmainly due to taxation of its U.S. subsidiary, Primus Asset Management,which is subject to U.S. federal income tax at a rate of 34 percent, aswell as U.S. state and local capital taxes. The Bermuda Minister ofFinance has given the Company a tax exemption certificate effectivethrough 2016 that prevents the Company from being subject to tax in theevent that any legislation is enacted that would impose tax computed onprofits or income, or computed on any capital asset, gain orappreciation, or any tax in the nature of estate duty or inheritancetax.

A reconciliation of the difference between the(provision)/benefit for income taxes and the expected tax provision atthe applicable zero percent domestic rate for the years ended December31, 2004, 2003, and 2002, is provided below:

|                                                                                             |  |        |         |         |  |        |     |         |  |        |      |         |  |  |
|---------------------------------------------------------------------------------------------|--|--------|---------|---------|--|--------|-----|---------|--|--------|------|---------|--|--|
| (inthousands)                                                                               |  |
|                                                                                        |  | 2004   |         | 2003    |  | 2002   |
| U.S.federal income tax (provision)/benefit on Primus AssetManagement's taxableincome/(loss) |  | $      | — |    |  | $      | 252 |    |  | $      | (157 | )  |
| U.S.state and local tax(provision)                                                          |  |   | (46     | )  |  |   | (80 | )  |  |   | (97  | )  |
| Totalincome tax(provision)/benefit                                                          |  | $      | (46     | )  |  | $      | 172 |    |  | $      | (254 | )  |
|                                                                                             |

TheCompany has a net deferred tax asset of $9.3 million, $5.9 million and$4.5 million as of December 31, 2004, 2003 and 2002, respectively. Thenet deferred tax asset is primarily comprised of stock compensationexpense and, capitalized costs and pre-operating formation costs whichare being amortized for tax purposes. In addition, included within thegross deferred tax assets are tax effected net operating losses of $3.9million related to the net operating loss of $281 thousand for 2002,$1.8 million for 2003 and $1.8 million for 2004. The Company hadpreviously estimated a 2003 net operating loss estimate of $145thousand. The completed 2003 tax return showed an actual net operatingloss of $1.8 million, which necessitated a true-up in 2004 to thedeferred tax asset and to the valuation allowance of $1.7 million. Netoperating losses will begin to expire in the year 2022 if notutilized.

The Company has recorded a 100 percent valuationallowance against its deferred tax asset because management hasdetermined that it is more likely than not that the deferred tax assetwill not be realized due to Primus Asset Management's history ofnet operating losses and inability to generate future taxable incomesufficient to utilize such deferred tax asset. A rollforward of thevaluation allowance against Primus Asset Management's deferredtax asset is provided below.

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PrimusGuaranty, Ltd.Notes to Consolidated Financial Statements(Continued)December 31, 2004

The components of the net deferred taxasset at December 31, 2004, 2003 and 2002, are as follows:

|                                                |  |            |         |         |  |        |         |         |  |        |         |         |  |  |
|------------------------------------------------|--|------------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
| (inthousands)                                  |  |       |         |
|                                           |  | December31 |
|                                           |  | 2004       |         | 2003    |  | 2002   |
| Deferredtax assets                             |  |
| Capitalized and pre-operatingformationcosts    |  | $          | 2,641   |    |  | $      | 5,408   |    |  | $      | 4,428   |    |
| Stockcompensation                              |  |       | 3,270   |    |  |   | 397     |    |  |   | — |    |
| Netoperatinglosses                             |  |       | 3,873   |    |  |   | 426     |    |  |   | 281     |    |
| Grossdeferred taxasset                         |  |       | 9,784   |    |  |   | 6,231   |    |  |   | 4,709   |    |
|                                           |  |
| Deferredtax liability                          |  |
| Stockcompensation                              |  |       | — |    |  |   | — |    |  |   | (118    | )  |
| Depreciation                                   |  |       | (477    | )  |  |   | (317    | )  |  |   | (52     | )  |
| Grossdeferred taxliability                     |  |       | (477    | )  |  |   | (317    | )  |  |   | (170    | )  |
| Netdeferred taxasset                           |  |       | 9,307   |    |  |   | 5,914   |    |  |   | 4,539   |    |
| Valuationallowance                             |  |       | (9,307  | )  |  |   | (5,914  | )  |  |   | (4,539  | )  |
| Netdeferred tax asset after valuationallowance |  | $          | — |    |  | $      | — |    |  | $      | — |    |
|                                                |

Thechanges in the valuation allowance for the deferred tax asset for theyears ended December 31, 2004, 2003 and 2002, are as follows:

|                                             |  |            |        |         |  |        |       |         |  |        |       |         |  |  |
|---------------------------------------------|--|------------|--------|---------|--|--------|-------|---------|--|--------|-------|---------|--|--|
|                                        |  | December31 |
| (inthousands)                               |  | 2004       |        | 2003    |  | 2002   |
| Balanceat beginning ofperiod                |  | $          | 5,914  |    |  | $      | 4,539 |    |  | $      | 3,182 |    |
| Capitalizedand pre-operating formationcosts |  |       | (2,767 | )  |  |   | 980   |    |  |   | 1,246 |    |
| Stockcompensation                           |  |       | 2,873  |    |  |   | 515   |    |  |   | (118  | )  |
| Taxdepreciation/Other                       |  |       | (160   | )  |  |   | (265  | )  |  |   | (52   | )  |
| Netoperatingloss                            |  |       | 3,447  |    |  |   | 145   |    |  |   | 281   |    |
| Balanceat end ofperiod                      |  | $          | 9,307  |    |  | $      | 5,914 |    |  | $      | 4,539 |    |
|                                             |

Thetax consequences of various restructurings that took place in 2002, asdescribed above, include certain limitations, including those providedby Internal Revenue Code Section 382, which could limit the utilizationof certain amortized costs as an offset against Primus AssetManagement's taxable income.

11.    PreferredSecurities of Subsidiary

On December 19, 2002, Primus Financialissued $110 million of perpetual Floating Rate Cumulative PreferredSecurities ("Preferred Securities") in twoseries, Series I and Series II to a trust, (the"Trust"). The securities are held by DeutscheBank Trust Company Americas, as custodian and auction agent. Pursuantto AICPA SOP 98-5, specific incremental costs directly attributable tothe offering of the Trust preferred securities have been chargedagainst these gross proceeds.

In conjunction with the receipt ofthe Securities, the Trust issued $100 million of Money Market PreferredSecurities Custodial Receipts ("MMP") in twoseries, Series A and Series B, with a liquidation preference of $1,000per share, to various institutional investors in a private placement.The Trust also issued $10 million of Variable Inverse PreferredSecurities Custodial Receipts ("VIP"), whichwere retained by Primus Financial.

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PrimusGuaranty, Ltd.Notes to Consolidated Financial Statements(Continued)December 31, 2004

In 2003, the Company adopted FIN 46R anddeconsolidated the Trust effective December 19, 2002. The preferredsecurities referred to in the financial statements are PrimusFinancial's Preferred Securities, which are shown net of the $10million of VIP issued by the Trust that are held by PrimusFinancial.

Distributions to the Trust on the PreferredSecurities are adjusted through the VIP to equal the distributionsrequired on the MMP. The Series A MMP pays distributions every 28 daysbased upon an auction rate set on the prior business day. The Series BMMP began making dividend payments quarterly beginning April 21, 2003and ended January 20, 2004, based on the annual auction rate of2.25% set on December 19, 2002. The distribution rate was resetfor another one year period on January 20, 2004, making quarterlydividend payments that began on April 21, 2004, at an auction rate of2.11%. On January 19, 2005, the distribution rate was set at4.0% for another one-year period, beginning quarterlydistributions on April 18, 2005. After December 19, 2012, the Companymay redeem the Preferred Securities, in whole or in part, on anydistribution date at $1,000 per share plus accumulated and unpaiddividends.

12.    Shareholders' Equity

        Convertible Preferred Stock

On March 14, 2002,the Company issued 6,212,000 shares of Series A Convertible VotingPreferred Shares ("Series A PreferredStock"), par value of $0.01 per share, at a price of $25per share. Each share was convertible at any time into 38.57 shares(4.8262548 shares after adjusting for the reverse split) of theCompany's common stock ("CommonStock").

In connection with the Company's IPOon September 30, 2004, the Series A Preferred Stock was automaticallyconverted into 29,980,691 shares of Common Stock.

        Common Stock

Primus Guaranty had 42,780,033 and2,600,000 shares of Common Stock issued and outstanding at December 31,2004 and 2003, respectively, each share having a par value of$0.08.

        Warrants

In connection with theSeries A Preferred Stock issuance, XL Insurance (Bermuda) Ltd., asubsidiary of XL Capital Ltd., the lead investor in the Series APreferred Stock, and Radian Group Inc., also an investor, were issuedwarrants on the closing date to purchase 1,414,746 and 1,061,059 commonshares, respectively. Both warrants are exercisable at a price percommon share of $5.18 until March 14, 2007.

On May 15, 2004,Radian Group, Inc. exercised its warrants that were convertible into1,061,059 common shares at the exercise price of $5.18 per share,yielding proceeds to the Company of $5.5 million.

Radian GroupInc. was also issued warrants to purchase 1,093,877 common shares at anexercise price per common share of $5.18, exercisable until March 14,2007, subject to a vesting schedule beginning on April 12, 2003("Vesting Warrants"). Exercise of the VestingWarrants was conditional on the effectiveness on the vesting date ofthe Excess-of-Loss Insurance Policy issued by Radian Reinsurance, Inc.On February 1, 2003, Primus Financial terminated the Excess-of-LossInsurance Policy effective March 30, 2003. As a result of thetermination, on March 30, 2003, the full amount of Vesting Warrants wasdeemed unexercisable and null and void. No value has been ascribed tothese warrants.

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PrimusGuaranty, Ltd.Notes to Consolidated Financial Statements(Continued)December 31, 2004

13.    Earnings per share

Basicearnings per share ("EPS") is calculated bydividing earnings available to common shareholders by theweighted-average number of common shares outstanding. Diluted EPS issimilar to basic EPS, but adjusts for the effect of the potentialissuance of common shares. The following table presents thecomputations of basic and diluted EPS:

|                                                    |  |             |        |        |  |        |         |                 |  |        |         |                 |  |  |
|----------------------------------------------------|--|-------------|--------|--------|--|--------|---------|-----------------|--|--------|---------|-----------------|--|--|
|                                               |  | December31, |
|                                               |  | 2004        |        | 2003   |  | 2002   |
| Netearnings (loss) available to commonshareholders |  | $           | 23,685 |   |  | $      | 78,471  |            |  | $      | (3,069  | )          |
| Weighted-averagebasic sharesoutstanding            |  |        | 16,486 |   |  |   | 2,517   |            |  |   | 2,510   |            |
| **Effectof dilutive instruments**                  |  |
| Series A PreferredStock                            |  |        | 22,381 |   |  |   | 29,981  |            |  |   | — |  (a)  |
| Employeestockoptions                               |  |        | 85     |   |  |   | — |  (a)  |  |   | — |            |
| Restrictedshareunits                               |  |        | 361    |   |  |   | 300     |            |  |   | — |  (a)  |
| Warrants                                           |  |        | 943    |   |  |   | 939     |            |  |   | — |  (a)  |
| Dilutivepotentialshares                            |  |        | 23,770 |   |  |   | 31,220  |            |  |   | — |            |
| Dilutedshares                                      |  |        | 40,256 |   |  |   | 33,737  |            |  |   | 2,510   |            |
| BasicEPS                                           |  | $           | 1.44   |   |  | $      | 31.18   |            |  | $      | (1.22   | )          |
| DilutedEPS                                         |  | $           | 0.59   |   |  | $      | 2.33    |            |  | $      | (1.22   | )          |
|                                                    |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (a) | Securities(including those issuable pursuant to contingent stock agreements) thatcould potentially dilute basic EPS were not included in the computationof diluted EPS because to do so would have been anti-dilutive for theperiod presented. In 2003, employee stock options totaling 209,375shares were excluded. In 2002, Series A Preferred Stock which convertsto 29,981 thousand shares of Common Stock, restricted share units equalto 213,125 shares and warrants representing 3,569,682 shares of CommonStock were excluded. |

14.    Commitments andContingencies

        Leases

Primus Financial hasleased its premises at 360 Madison Avenue, New York, New York fromMadison 45 LLC at a fixed yearly rental (subject to certain escalationsspecified in the lease) until August 1, 2012. There are no materialrestrictions imposed by the lease agreement. The lease is categorizedas an operating lease and future payments as of December 31, 2004 underthe lease are as follows (in thousands):

|                   |  |        |       |        |  |  |
|-------------------|--|--------|-------|--------|--|--|
| 2005              |  | $      | 738   |   |
| 2006              |  |   | 756   |   |
| 2007              |  |   | 756   |   |
| 2008              |  |   | 756   |   |
| 2009andthereafter |  |   | 2,755 |   |
| Total             |  | $      | 5,761 |   |
|                   |

Perthe terms of the lease, Primus Financial was not required to make anyrent payments until March 2003. Primus Financial recognizes rentexpense from July 25, 2002 (the lease commencement date) based on astraight-line amortization of the total lease obligation. PrimusFinancial has recorded deferred rent payable on the statement offinancial condition, which represents the amortized cost that will bepayable in the future.

75

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PrimusGuaranty, Ltd.Notes to Consolidated Financial Statements(Continued)December 31, 2004

Primus Financial has an outstanding letterof credit for $756 thousand from Harris Trust and Savings Bank("Harris Bank") related to this lease.

Statutory Requirements

Primus Re is an insurancecompany subject to Bermuda insurance regulations. Primus Re'sability to pay dividends and make capital distributions is subject torestrictions based principally on the amount of Primus Re's netpremiums written and net loss reserves, subject to an overall minimumstatutory capital and surplus of $1.0 million. In addition, Primus Reis required to maintain a minimum statutory liquidity ratio. AtDecember 31, 2004, Primus Re's statutory capital and surplus was$1.01 million and the minimum amount required to be maintained was $1.0million. At December 31, 2003, Primus Re's statutorycapital and surplus was $1.02 million and the minimum amount requiredto be maintained was $1.0 million.

15.    LiquidityFacility

Primus Financial has obtained a Liquidity Facilityfrom Harris Bank for $37.5 million. At December 31, 2004, the LiquidityFacility had a termination date of March 2005, and may be extended forsuccessive one year periods upon the request of Primus Financial andagreement of Harris Bank. The Liquidity Facility may only be drawn uponin the event that (a) there is a Credit Event (as defined in eachCredit Swap) on a credit swap sold by Primus Financial, (b) such creditswap requires Physical Delivery (as defined in each Credit Swap), (c)Primus Financial cannot otherwise make its required settlement ascalled for by the terms of the Credit Swap, and (d) Primus Financialhas investment securities that are available to be pledged ascollateral to secure any advances under the Liquidity Facility.

As of December 31, 2004 there have been no drawings under theLiquidity Facility.

16.    Related Party Transactions

Simultaneously with the sale of the Company's Series APreferred Stock (see Note 12 above), the Company repaid outstandingadvances from and retired 1.2 million shares of the Company'sSeries B Preferred Stock held by E. Capital Technologies, LLC andPrimus Capital Advisors, LLC, affiliates of Jay H. Shidler, one of theCompany's directors, for $11.73 million. The Company also repaidan aggregate of $5.0 million outstanding under a credit facility withMorgan Guaranty Trust Company of New York (now J.P. Morgan Chase &Co.) that certain affiliates of Mr.  Shidler had drawn down.

On May 15, 2004, Radian Group, Inc. exercised its warrants (see Note12 above).

17.    Employee Compensation Plans

PrimusGuaranty has established three incentive compensation plans for thebenefit of its employees.

        Initial Staffing AwardPool

During 2001, an award pool of Common Stock of PrimusGuaranty totaling 1,500,000 shares was established (the"Initial Staffing Award Pool"). A total of912,500 of these shares were awarded to selected members of PrimusAsset Management ("Initial Awards"). Theseawards vested immediately. The Company estimated that the fair value ofthe Common Stock at the time the Initial Awards were granted was $0.08per share.

Between March 14, 2002 and December 31, 2002,additional awards totaling 405,000 shares were made to certainadditional employees from the Initial Staffing Award Pool("Post-Funding Awards"). 

76

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PrimusGuaranty, Ltd.Notes to Consolidated Financial Statements(Continued)December 31, 2004

These awards vest ratably over a three-yearperiod. Vesting is subject to certain terms, including the continuedemployment of the award recipient by Primus Asset Management. Upon theIPO by the Company, 50% of the then unvested shares vested.

The Company estimated the fair value of the Common Stock at the timethe Post-Funding Awards were granted at $2.56 per share. Stockcompensation expense of $226 thousand related to these awards wasrecorded in the 2002 consolidated statement of operations. These awardsrepresent non-cash financing transactions.

During 2003, theCompany awarded 183,000 shares from the Initial Staffing Award Pool,including the repurchase of certain vested shares from employees thatleft the employment of the Company. The Company estimated the fairvalue of the Common Stock during 2003 to be $6.93 per share. Stockcompensation expense of $259 thousand related to these awards and $310thousand related to the 2002 awards was recorded in the 2003consolidated statement of operations.

During 2004, $1.1 millionof stock compensation expense was recorded for Initial Staffing AwardPool grants outstanding, including $443 thousand for the acceleratedvesting of stock in connection with the Company's IPO. There wereno grants made during 2004.

        Annual PerformanceBonus Plan

The Annual Performance Bonus Plan("Bonus Plan") was created in 2002 andprovides for the awards of cash to employees of Primus Asset Managementand RSUs convertible at the option of the holder into Common Stock ofPrimus Guaranty. The total value of awards under the Bonus Plan isdetermined by the Compensation Committee of Primus Guaranty based onquantitative and non-quantitative measures of the performance of PrimusGuaranty. Individual awards are then determined by the Chief ExecutiveOfficer of Primus Guaranty, and are subject to the approval of theCompensation Committee. The Compensation Committee also determines theawards to the executive officers. Under the terms of the planindividual awards will be made 75% in cash and 25% inRSUs (70% in cash and 30% in RSUs for certain members ofmanagement), with the number of RSUs determined on the basis of thevalue of the Common Stock at the end of the year preceding the awarddate or the date the award is authorized. The RSUs, or if converted,the Common Stock, vest ratably over a three year period on theanniversary dates of each award, with vesting subject to certain termsincluding the continued employment of the award recipient by PrimusAsset Management. The Bonus Plan includes provision for the award of upto 1,393,652 RSUs and Options (discussed below) over a five year periodbeginning in February 2003.

In February 2003, the Company madeawards under the Bonus Plan totaling $5.0 million for the period endedDecember 31, 2002, of which $3.75 million was awarded in cash andincluded as compensation expense, and $1.25 million was awarded in theform of RSUs for 181,000 shares of Common Stock (based upon theestimated fair value of Common Stock of $6.93 per share on the date ofthe awards). The value of the RSUs is being expensed as the RSUs areearned, beginning in 2003. The Company recognized $533 thousand and$387 thousand of expense for the years ended December 31, 2004 and2003, respectively, including $231 thousand for the year ended December31, 2004 for the accelerated vesting of stock in connection with theCompany's IPO.

In January 2004, the Company approvedawards under the Bonus Plan totaling $7.77 million for the period endedDecember 31, 2003, of which $4.75 million was awarded in cash andincluded as compensation expense, and $3.02 million was awarded in theform of RSUs for 191,000 shares of Common Stock (based upon theestimated fair value of Common Stock of $15.84 per share on the date ofthe awards). The value of the RSUs is expensed as the RSUs are earnedover the vesting period. For the year ended December 31, 2004, stockcompensation expense totaling $1.8 million was recognized for RSUgrants issued under the Bonus Plan for the year ended December 31,2004, including $1.1 million for the accelerating vesting of stock inconnection with the Company's IPO.

77

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PrimusGuaranty, Ltd.Notes to Consolidated Financial Statements(Continued)December 31, 2004

        Stock Incentive Plan

The Stock Incentive Plan ("IncentivePlan") was created in 2002 and provides for the award ofoptions on Common Stock of Primus Guaranty("Options") to selected employees of PrimusAsset Management. Individual awards are determined by the ChiefExecutive Officer of the Company, and are subject to the approval ofthe Compensation Committee. The Compensation Committee also determinesthe awards to the executive officers. The Options become exercisableratably over a four year period on the anniversary date of each award,subject to certain terms including the continued employment of eachrecipient by the Primus Asset Management. The Options expire ten yearsfrom the date of grant and do not qualify for Incentive Stock OptionTreatment under the Economic Recovery Tax Act of 1981 (ISO Treatment).Upon the IPO by the Company, 50% of the then unvested optionsvested. The total number of equity incentive awards authorized forissuance under the Incentive Plan is 12% of total authorizedshares.

In January 2003, the Company approved awards under theIncentive Plan for 240,625 Options with an exercise price of $6.93 andwhich began to vest in February 2004. At December 31, 2004, 1,562Options have been exercised. The Company recognized $412 and $190thousand of stock compensation expense for the years ended December 31,2004 and 2003, respectively, for these Options, including $236 thousandfor the year ended December 31, 2004 for the accelerated vesting ofOptions in connection with the Company's IPO.

In January2004, the Company approved awards under the Incentive Plan for 322,500Options with an exercise price of $9.76 and which began to vest inFebruary 2004. The Company recognized $2.0 million of stockcompensation expense during 2004 for these Options, including $1.3million for the accelerated vesting of Options in connection with theCompany's IPO.

        2004 Share Incentive Plan

In October 2004, in connection with the Company's IPO, itsboard of directors approved the grant of options and performance commonshares (the "IPO awards") in the aggregateamount of up to 2.4% of total authorized shares. The board ofdirectors delegated to the compensation committee decisions regardingthe terms and conditions of such awards, including the apportionmentbetween options and performance common shares, the employees to whomsuch awards are to be granted and the performance factors required toearn such common shares. The performance factors are (i) the return oneconomic equity and (ii) the compound annual growth rate of theeconomic results over the following three years after grant.

TheIPO awards of 259,063 performance Common Stock and 259,063 Options withan exercise price of $13.50 were granted in October 2004. The cost ofthe IPO awards is recognized over the vesting period for the awards inaccordance with FAS 123. The cost of the performance Common Stock isrecognized ratably from the date of the IPO to December 31, 2006. Thecost of Options is recognized ratably over four years from theconsummation of the IPO. The expense associated with the performanceshares will be adjusted over the vesting period to reflect theprojected actual award, which is based upon the aggregate performanceof the company in the years 2004, 2005 and 2006. The Company recognized$461 thousand of expense for the year ended December 31, 2004 relatedto these awards.

In connection with the IPO, as discussed above,the Company recognized $3.3 million of expense for the acceleratedvesting of stock and Options under the Company's Initial StaffingAward Pool, Bonus Plan, Stock Incentive Plan and 2004 Share IncentivePlan.

The fair value of each Option grant is estimated on thedate of grant using the Black-Scholes option-pricing model using thefollowing assumptions for the period indicated:

78

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PrimusGuaranty, Ltd.Notes to Consolidated Financial Statements(Continued)December 31, 2004

|                        |  |                 |      |              |  |             |      |         |  |        |      |         |  |  |
|------------------------|--|-----------------|------|--------------|--|-------------|------|---------|--|--------|------|---------|--|--|
|                   |  | OptionGrantDate |
|                   |  | February2003    |      | February2004 |  | October2004 |
| Risk free interestrate |  |            | 3.95 | %       |  |        | 4.04 | %  |  |   | 3.08 | %  |
| Volatility             |  |            | 39.2 | %       |  |        | 27.9 | %  |  |   | 28.3 | %  |
| Expecteddividendyield  |  |            | 0.00 |         |  |        | 0.00 |    |  |   | 0.00 |    |
| Expectedoption life    |  | 10 years        |      | 10years      |  | 7 years     |
|                        |

The following table is asummary of the information concerning outstanding and exercisableoptions at December 31, 2004. 

|                                         |  |                 |         |                              |  |                |      |                              |  |                |         |                              |  |                |      |                              |  |        |         |        |  |        |         |        |  |        |         |         |  |   |       |        |  |  |
|-----------------------------------------|--|-----------------|---------|------------------------------|--|----------------|------|------------------------------|--|----------------|---------|------------------------------|--|----------------|------|------------------------------|--|--------|---------|--------|--|--------|---------|--------|--|--------|---------|---------|--|---|-------|--------|--|--|
|                                    |  | OptionGrantDate |         |
|                                    |  | February2003    |         | February 2004                |  | October2004    |      | Total                        |
|                                    |  | Numberofshares  |         | Weightedaverageexerciseprice |  | Numberofshares |      | Weightedaverageexerciseprice |  | Numberofshares |         | Weightedaverageexerciseprice |  | Numberofshares |      | Weightedaverageexerciseprice |
| Granted                                 |  |            | 240,625 |                         |  | $              | 6.93 |                         |  |           | 322,500 |                         |  | $              | 9.76 |                         |  |   | 259,063 |   |  | $      | 13.50   |   |  |   | 822,188 |    |  | $ | 10.00 |   |
| Exercised                               |  |            | (1,562  | )                       |  | $              | 6.93 |                         |  |           | — |                         |  | $              | 9.76 |                         |  |   | — |   |  | $      | 13.50   |   |  |   | (1,562  | )  |  | $ | 6.93  |   |
| Forfeited                               |  |            | (38,282 | )                       |  | $              | 6.93 |                         |  |           | (6,250  | )                       |  | $              | 9.76 |                         |  |   | — |   |  | $      | 13.50   |   |  |   | (44,532 | )  |  | $ | 7.33  |   |
| Optionsoutstanding at December 31,2004  |  |            | 200,781 |                         |  | $              | 6.93 |                         |  |           | 316,250 |                         |  | $              | 9.76 |                         |  |   | 259,063 |   |  | $      | 13.50   |   |  |   | 776,094 |    |  | $ | 10.28 |   |
| Optionsexercisable at December 31, 2004 |  |            | 123,044 |                         |  | $              | 6.93 |                         |  |           | 158,123 |                         |  | $              | 9.76 |                         |  |   | — |   |  |   | — |   |  |   | 281,167 |    |  | $ | 8.52  |   |
| AverageContractuallife                  |  | 8.1years        |         | 9.1 years                    |  | 6.8years       |      | 8.1 years                    |
|                                         |

18.    DividendRestrictions

Primus Financial's operating guidelinesrestrict the payment of dividends to once per year. The payment ofdividends by Primus Financial is contingent upon a dividend payment notresulting in a capital shortfall under its operating guidelines and thedividend not exceeding 25% of Primus Financial's netincome (excluding mark-to-market unrealized gains or losses on creditswaps). Primus Financial is further restricted from paying dividendsunder the terms of its Preferred Securities, unless all of thecumulative distributions on the Preferred Securities have beenpreviously made or set aside. Primus Financial's $37.5 millioncredit facility also restricts payment of dividends by Primus Financialexcept as permitted by its operating guidelines. The Company'sinsurance subsidiary, Primus Re, is also subject to significantregulatory restrictions limiting its ability to declare and paydividends.

Further, the Company is subject to Bermuda law andregulatory constraints that will affect its ability to pay dividends onits common shares and make other payments. Under the Bermuda CompaniesAct, each of Primus Guaranty, Primus Bermuda and Primus Re may notdeclare or pay a dividend out of distributable reserves if there arereasonable grounds for believing that each of us is, or would after thepayment be, unable to pay the respective liabilities as they becomedue; or if the realizable value of our respective assets would therebybe less than the aggregate of our respective liabilities and issuedshare capital and share premiumaccounts.

79

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PrimusGuaranty, Ltd.Notes to Consolidated Financial Statements(Continued)December 31, 2004

19.    Quarterly Operating Results (unaudited)

|                                 |  |              |        |               |  |              |       |               |  |        |        |        |  |        |        |        |  |  |
|---------------------------------|--|--------------|--------|---------------|--|--------------|-------|---------------|--|--------|--------|--------|--|--------|--------|--------|--|--|
| 2004:                           |  | FirstQuarter |        | SecondQuarter |  | ThirdQuarter |       | FourthQuarter |
| Totalrevenues                   |  | $            | (2,325 | )        |  | $            | 6,659 |          |  | $      | 24,665 |   |  | $      | 24,756 |   |
| Operatingincome(loss)           |  |         | (8,190 | )        |  |         | 219   |          |  |   | 18,004 |   |  |   | 13,698 |   |
| Netincome(loss)                 |  |         | (8,262 | )        |  |         | 174   |          |  |   | 18,026 |   |  |   | 13,747 |   |
| Basicearnings (loss) pershare   |  | $            | (3.21  | )        |  | $            | 0.05  |          |  | $      | 4.23   |   |  | $      | 0.32   |   |
| Dilutedearnings (loss) pershare |  | $            | (3.21  | )        |  | $            | 0.01  |          |  | $      | 0.51   |   |  | $      | 0.31   |   |
|                                 |

|                          |  |              |        |               |  |              |        |               |  |        |        |        |  |        |        |        |  |  |
|--------------------------|--|--------------|--------|---------------|--|--------------|--------|---------------|--|--------|--------|--------|--|--------|--------|--------|--|--|
| 2003:                    |  | FirstQuarter |        | SecondQuarter |  | ThirdQuarter |        | FourthQuarter |
| Totalrevenues            |  | $            | 12,485 |          |  | $            | 46,623 |          |  | $      | 22,437 |   |  | $      | 24,505 |   |
| Operatingincome          |  |         | 6,673  |          |  |         | 40,495 |          |  |   | 16,605 |   |  |   | 14,526 |   |
| Netincome                |  |         | 6,536  |          |  |         | 40,527 |          |  |   | 16,583 |   |  |   | 14,825 |   |
| Basicearnings pershare   |  | $            | 2.70   |          |  | $            | 16.11  |          |  | $      | 6.59   |   |  | $      | 5.89   |   |
| Dilutedearnings pershare |  | $            | 0.20   |          |  | $            | 1.20   |          |  | $      | 0.49   |   |  | $      | 0.44   |   |
|                          |

20.    ParentCompany Financial Statements

Primus Guaranty, Ltd.Statement of FinancialCondition

|                                          |  |            |         |        |  |        |         |        |  |  |
|------------------------------------------|--|------------|---------|--------|--|--------|---------|--------|--|--|
| (inthousands)                            |  | December31 |
|                                     |  | 2004       |         | 2003   |
| Assets                                   |  |
| Cashand cashequivalents                  |  | $          | 54,088  |   |  | $      | 2,515   |   |
| Intercompanyreceivable                   |  |       | 6,951   |   |  |   | 1,434   |   |
| Investmentin subsidiaries, atequity      |  |       | 299,907 |   |  |   | 210,889 |   |
| Accountsreceivable                       |  |       | 44      |   |  |   | — |   |
| Prepaidassets                            |  |       | 7       |   |  |   | — |   |
| Totalassets                              |  |       | 360,997 |   |  |   | 214,838 |   |
| Liabilitiesand shareholders' equity      |  |
| Accountspayable                          |  |       | — |   |  |   | — |   |
| Totalliabilities                         |  |       | — |   |  |   | — |   |
| Commonstock                              |  |       | 3,535   |   |  |   | 230     |   |
| AdditionalPaid-in-capital                |  |       | 264,860 |   |  |   | 1,325   |   |
| ConvertiblePreferredstock                |  |       | — |   |  |   | 143,908 |   |
| Warrants                                 |  |       | 612     |   |  |   | 1,070   |   |
| Retainedearnings                         |  |       | 91,990  |   |  |   | 68,305  |   |
| TotalShareholders'Equity                 |  |       | 360,997 |   |  |   | 214,838 |   |
| Totalliabilities and shareholders'equity |  | $          | 360,997 |   |  | $      | 214,838 |   |
|                                          |

80

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PrimusGuaranty, Ltd.Notes to Consolidated Financial Statements(Continued)December 31, 2004

Primus Guaranty, Ltd. Statement ofOperations

|                                                       |  |                       |        |        |  |        |         |        |  |        |         |         |  |  |
|-------------------------------------------------------|--|-----------------------|--------|--------|--|--------|---------|--------|--|--------|---------|---------|--|--|
| (inthousands)                                         |  | Year ended December31 |
|                                                  |  | 2004                  |        | 2003   |  | 2002   |
| Revenues                                              |  |
| Interestincome                                        |  | $                     | 266    |   |  | $      | 24      |   |  | $      | 24      |    |
| Foreigncurrencyrevaluation                            |  |                  | 115    |   |  |   | — |   |  |   | — |    |
| Totalrevenues                                         |  |                  | 381    |   |  |   | 24      |   |  |   | 24      |    |
| Expenses                                              |  |
| Exchangefees                                          |  |                  | 194    |   |  |   | — |   |  |   | — |    |
| Professionaland legalfees                             |  |                  | 19     |   |  |   | 8       |   |  |   | — |    |
| Bankfees                                              |  |                  | 1      |   |  |   | — |   |  |   | — |    |
| Totalexpenses                                         |  |                  | 214    |   |  |   | 8       |   |  |   | — |    |
| Incomebefore equity in earnings ofsubsidiaries        |  |                  | 167    |   |  |   | 16      |   |  |   | 24      |    |
| Equityin earnings (losses) of subsidiaries, net oftax |  |                  | 23,518 |   |  |   | 78,455  |   |  |   | (3,093  | )  |
| NetIncome(loss)                                       |  | $                     | 23,685 |   |  | $      | 78,471  |   |  | $      | (3,069  | )  |
|                                                       |

PrimusGuaranty, Ltd. Statement of CashFlows

|                                                                                                  |  |                       |         |         |  |        |         |         |  |        |          |         |  |  |
|--------------------------------------------------------------------------------------------------|--|-----------------------|---------|---------|--|--------|---------|---------|--|--------|----------|---------|--|--|
| (inthousands)                                                                                    |  | Year ended December31 |
|                                                                                             |  | 2004                  |         | 2003    |  | 2002   |
| Cashflows from operating activities:                                                             |  |
| Net income(loss)                                                                                 |  | $                     | 23,685  |    |  | $      | 78,471  |    |  | $      | (3,069   | )  |
| Adjustmentsto reconcile net income (loss) to net cash provided by (used in)operating activities: |  |
| Non-cash itemsincluded in net income (loss):                                                     |  |
| Equity insubsidiaries' earnings, net oftax                                                       |  |                  | (23,518 | )  |  |   | (78,455 | )  |  |   | 3,093    |    |
| Increase(decrease) in cash resulting from changesin:                                             |  |
| Intercompanyreceivable/payable                                                                   |  |                  | (5,517  | )  |  |   | — |    |  |   | 121      |    |
| Accountsreceivable                                                                               |  |                  | (44     | )  |  |   | — |    |  |   | —  |    |
| Prepaidexpenses                                                                                  |  |                  | (7      | )  |  |   | — |    |  |   | —  |    |
| Netcash provided by (used in) operatingactivities                                                |  |                  | (5,401  | )  |  |   | 16      |    |  |   | 145      |    |
| Cashflows from investing activities                                                              |  |
| Investment insubsidiaries                                                                        |  |                  | (65,500 | )  |  |   | — |    |  |   | (142,324 | )  |
| Netcash used in investingactivities                                                              |  |                  | (65,500 | )  |  |   | — |    |  |   | (142,324 | )  |
| Cashflows from financing activities                                                              |  |
| Proceeds fromissuance of commonshares                                                            |  |                  | 116,974 |    |  |   | — |    |  |   | —  |    |
| Proceedsfrom issuance of preferred securities andwarrants                                        |  |                  | — |    |  |   | — |    |  |   | 144,678  |    |
| Proceedsfrom exercise ofwarrants                                                                 |  |                  | 5,500   |    |  |   | — |    |  |   | —  |    |
| Proceedsfrom issuance of preferredshares                                                         |  |                  | — |    |  |   | — |    |  |   |     |    |
| Netcash provided by financingactivities                                                          |  |                  | 122,474 |    |  |   | — |    |  |   | 144,678  |    |
| Netincrease incash                                                                               |  |                  | 51,573  |    |  |   | 16      |    |  |   | 2,499    |    |
| Cashand cash equivalents at beginning ofyear                                                     |  |                  | 2,515   |    |  |   | 2,499   |    |  |   | —  |    |
| Cashand cash equivalents at end ofyear                                                           |  | $                     | 54,088  |    |  | $      | 2,515   |    |  | $      | 2,499    |    |
|                                                                                                  |

81

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PrimusGuaranty, Ltd.Notes to Consolidated Financial Statements(Continued)December 31, 2004

Item 9.    Changes in and Disagreementswith Accountants on Accounting and Financial Disclosures

None.

Item 9A.    Controls and Procedures

Thecompany has carried out an evaluation, under the supervision and withthe participation of the company's management, including theChief Executive Officer and Chief Financial Officer, of theeffectiveness of disclosure controls and procedures pursuant to rules13a-15 and 15-15d promulgated under the Securities and Exchange Act of1934 as of the end of the period covered by this report. Based on thatevaluation, the Chief Executive Officer and the Chief Financial Officerconcluded that the disclosure controls and procedures are effective toprovide reasonable assurance that all material information relating tothe company required to be filed in this report have been made known tothem in a timely fashion. There have been no changes in internalcontrol over financial reporting that occurred during the most recentfiscal quarter that have materially affected, or are reasonably likelyto affect, internal control over financial reporting.

Thecompany's management, including the Chief Executive Officer andthe Chief Financial Officer, does not expect that the company'sdisclosure controls or its internal controls will prevent all errorsand all fraud. Further, the design of a control system must reflect thefact that there are resource constraints, and the benefits of controlsmust be considered relative to their costs. As a result of the inherentlimitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances offraud, if any, within the company have been detected. These inherentlimitations include the realities that judgments in decision-making arefaulty, and that breakdowns can occur because of simple error ormistake. As a result of the inherent limitations in a cost-effectivecontrol system, misstatements due to error or fraud may occur and notbe detected. Accordingly, the company's disclosure controls andprocedures are designed to provide reasonable, not absolute, assurancethat the disclosure controls and procedures are met.

Item9B.    Other information

None. All items requiring disclosurein a report on Form 8-K during the fourth quarter of the year endedDecember 31, 2004, have been so reported.

Part III.

Item 10.    Directors and Executive Officers of theRegistrant

Information regarding directors is set forth under"Election of Directors" in thecompany's Proxy Statement to be filed on or before April 30, 2005( the "Proxy Statement"), which isincorporated in this Item 10 by reference.

Information regarding executive officers is set forthunder "Executive Officers," in the ProxyStatement, which is incorporated in this Item 10 by reference.

Information regarding Section 16(a) is set forth under"Section 16(a) Beneficial Ownership ReportingCompliance" in the Proxy Statement, which is incorporatedin this Item 10 by reference.

The company has adopted a code ofbusiness conduct and ethics for all employees, including its ChiefExecutive Officer and Chief Financial Officer. A copy of such code ofethics can be found on the Company's website, atwww.primusguaranty.com, free of charge. The Company would intend tosatisfy the disclosure requirements regarding an amendment to, orwaiver from, a provision of its code of ethics and that relates to asubstantive amendment or material departure from a provision of thecode by posting such information on its internet website atwww.primusguaranty.com.

Item 11.    ExecutiveCompensation

Information regarding compensation of thecompany's executive officers is set forth under"Executive Officer Compensation" and in thecompensation tables in the Proxy Statement, which is incorporated inthis Item 11 by reference.

82

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PrimusGuaranty, Ltd.Notes to Consolidated Financial Statements(Continued)December 31, 2004

|                |                                                                                              |
|----------------|----------------------------------------------------------------------------------------------|
| Item 12.  | SecurityOwnership of Certain Beneficial Owners and Management and RelatedStockholder Matters |

Securities Authorized forIssuance under Equity Compensation Plans

The following tableprovides information as of December 31, 2004 with respect tocompensation plans (including individual compensation agreements)approved by security holders and under which our equity securities areauthorized forissuance.

|                                                          |  |                                                                                               |           |                                                                               |  |                                                                                                                                            |         |        |  |        |           |           |  |  |
|----------------------------------------------------------|--|-----------------------------------------------------------------------------------------------|-----------|-------------------------------------------------------------------------------|--|--------------------------------------------------------------------------------------------------------------------------------------------|---------|--------|--|--------|-----------|-----------|--|--|
| PlanCategory                                             |  | Number of Securities to beIssued upon Exercise of Outstanding Options, Warrants andRights (a) |           | Weighted-Average Exercise Price ofOutstanding Options, Warrants and Rights(b) |  | Number ofSecurities Remaining Available for Future Issuance Under EquityCompensation Plans (Excluding Securities Reflected in Column(a)(c) |
| Equity compensation plans approved bysecurityholders     |  |                                                                                          | 1,428,003 |                                                                          |  | $                                                                                                                                          | 10.28   |   |  |   | 4,537,673 | (1)  |
| Equitycompensation plans not approved by securityholders |  |                                                                                          | 401,250   | (2)                                                                      |  |                                                                                                                                       | — |   |  |   | —   |      |
| Total                                                    |  |                                                                                          | 1,829,253 |                                                                          |  | $                                                                                                                                          | 10.28   |   |  |   | 4,537,673 |      |
|                                                          |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                     |
|-----|---------------------------------------------------------------------------------------------------------------------|
| (1) | Represents12% of total issued and outstanding common shares at December31, 2004, less previously awardedsecurities. |

|     |                                                                                                                                                                       |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Represents RSUsgranted pursuant to individual compensation agreements, which vest overthree years from date of grant and generally expire upon employmenttermination. |

Additional information regarding securityownership of certain beneficial owners and management is set forthunder "Security Ownership of Certain Beneficial Owners andManagement" in the Proxy Statement, which is incorporatedin this Item 12 by reference.

Item 13.    CertainRelationships and Related Transactions

Information regardingrelationships and related transactions is set forth under"Certain Relationships and RelatedTransactions" in the Proxy Statement, which isincorporated in this Item 13 by reference.

Item14.    Principal Accounting Fees and Services

Informationconcerning principal accountant fees and services will be set forthunder "Audit Committee Report-Fees of the IndependentAuditors" in the Proxy Statement, which is incorporated inthis Item 14 by reference.

83

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Part IV.

Item 15.    Exhibits and Financial Statement Schedules

(a) Financial Statements

The financial statements areset forth under Item 8 of this Annual Report on Form 10-K.

(b) Financial Statement Schedules

The followinginformation is filed as part of this Annual Report on Form 10-K andshould be read in conjunction with the financial statements containedin Item 8:

Report of Independent Registered AccountingFirm

All other schedules have been omitted because they were notapplicable or because the required information has been included in thefinancial statements or notes thereto.

(c) Exhibits

Index toExhibits

|        |      |         |  |                                                                                                                                                                                                                              |  |  |
|--------|------|---------|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|
| Number |      | Exhibit |
|   | 3.1  |    |  | Memorandumof Association (Incorporated by reference to Exhibit 3.1 to the S-1dated July 23, 2004)                                                                                                                            |
|   | 3.2  |    |  | Bye-laws(Incorporated by reference to Exhibit 3.2 to the S-1/A dated June 10,2004)                                                                                                                                           |
|   | 4.1  |    |  | Specimen Common Share Certificate(Incorporated by reference to Exhibit 4.1 to the S-1/A dated July 23,2004)                                                                                                                  |
|   | 4.2  |    |  | Warrant to purchase 11,317,972common shares, par value $.01 per share, dated March 14, 2002, issuedby the Registrant to XL Insurance (Bermuda) Ltd. (Incorporated byreference to Exhibit 4.2 to the S-1 dated April 26,2004) |
|   | 10.1 |    |  | Employment Agreement with ThomasW. Jasper, dated August 16, 2004 (Incorporated by reference to Exhibit10.1 to the S-1 dated August 17,2004)                                                                                  |
|   | 10.2 |    |  | Employment Letter with ZacharySnow, dated April 26, 2002 (Incorporated by reference to Exhibit 10.2to the S-1/A dated June 10,2004)                                                                                          |
|   | 10.3 |    |  | Employment Letter with RichardClaiden, dated October 20, 2003 (Incorporated by reference to Exhibit10.3 to the S-1/A dated June 10,2004)                                                                                     |
|   | 10.4 |    |  | Form of Registration RightsAgreement 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)                                                      |
|   | 10.5 |    |  | Primus Guaranty, Ltd. 2002 StockIncentive Plan (Incorporated by reference to Exhibit 10.5 to the S-1dated April 26, 2004)                                                                                                    |
|   | 10.6 |    |  | Primus Guaranty,Ltd. 2004 Stock Incentive Plan (Incorporated by reference to Exhibit10.6 to the S-1/A dated July 23,2004)                                                                                                    |
|   | 10.7 |    |  | Primus Guaranty, Ltd. AnnualPerformance Bonus Plan (Incorporated by reference to Exhibit 10.7 tothe S-1 dated April 26, 2004)                                                                                                |
|   | 10.8 |    |  | PrimusGuaranty, Ltd. Severance Plan (Incorporated by reference to Exhibit10.8 to the S-1/A dated June 10,2004)                                                                                                               |
|   | 10.9 |    |  | Office Lease Agreement, datedJuly 25, 2002, between Madison 45 LLC and Primus Financial Products,LLC (Incorporated by reference to Exhibit 10.9 to the S-1 datedApril  26, 2004)                                             |
|        |

84

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|        |       |         |  |                                                                                                                                                                                                                                                                                                                                                                                                          |  |  |
|--------|-------|---------|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|
| Number |       | Exhibit |
|   | 10.10 |    |  | Credit Agreement,dated as of March 14, 2002, between Primus Financial Products, Inc. andHarris Trust and Savings Bank, as amended as of May 31, 2002, asfurther amended as of December 19, 2002, as further amended as of March13, 2003, as further amended as of January 19, 2004 and as furtheramended as of March 12, 2004 (Incorporated by reference to Exhibit10.10 to the S-1 dated April 26,2004) |
|   | 10.11 |    |  | Form of IndemnificationAgreement between the Registrant and each of its directors and officers(Incorporated by reference to Exhibit 10.11 to the S-1/A dated June 10,2004)                                                                                                                                                                                                                               |
|   | 10.12 |    |  | Indemnification Agreement, datedSeptember 22, 2004, between Primus Guaranty, Ltd. and XL Capital Ltd.(Incorporated by reference to Exhibit 10.12 to the S-1/A datedSeptember  24, 2004)                                                                                                                                                                                                                  |
|   | 21    |    |  | Subsidiariesof Primus Guaranty, Ltd.                                                                                                                                                                                                                                                                                                                                                                     |
|   | 23.3  |    |  | Consent ofErnst & Young LLP, Registered PublicAccountants                                                                                                                                                                                                                                                                                                                                            |
|   | 31.1  |    |  | Rule 13a-14(a)/15d-14(a)Certification                                                                                                                                                                                                                                                                                                                                                                    |
|   | 31.2  |    |  | Rule 13a-14(a)/15d-14(a)Certification                                                                                                                                                                                                                                                                                                                                                                    |
|   | 32.1  |    |  | Certification Pursuant to18 U.S.C. Section 1350, as Added By Section 906 of the Sarbanes-OxleyAct of 2002                                                                                                                                                                                                                                                                                                |
|        |

85

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrant has caused this Reportto be signed on its behalf by the undersigned, thereunto dulyauthorized.

|  | PRIMUS GUARANTY, LTD.(Registrant) |
|--|-----------------------------------|

|  | By /s/ Thomas W.Jasper |
|--|------------------------|

|  | Thomas W. JasperChief Executive Officer |
|--|-----------------------------------------|

Dated: March 21, 2005

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf ofthe registrant and in the capacities and on the datesindicated.

|                             |  |                                                                  |  |                          |
|-----------------------------|--|------------------------------------------------------------------|--|--------------------------|
| Signature                   |  | Title                                                            |  | Date                     |
|                             |
| /s/Thomas W. Jasper         |  | ChiefExecutive Officer and Director(Principal ExecutiveOfficer)  |  | March 21, 2005           |
|                             |
| Thomas W. Jasper            |
|                             |
| /s/Richard Claiden          |  | ChiefFinancial Officer(Principal Financial andAccountingOfficer) |  | March 21, 2005           |
|                             |
| Richard Claiden             |
|                             |
| /s/Michael P. Esposito, Jr. |  | Director and Chairman of theBoard                                |  | March 21,2005            |
|                             |
| Michael P. Esposito,Jr.     |
|                             |
|         |  | Director                                                         |  |      |
|                             |
| Frank P.Filipps             |
|                             |
|         |  | Director                                                         |  |      |
|                             |
| DuncanGoldie-Morrison       |
|                             |
| /s/Thomas J. Hartlage       |  | Director                                                         |  | March 21,2005            |
|                             |
| Thomas J.Hartlage           |
|                             |
| /s/ James K. Hunt           |  | Director                                                         |  | March 21,2005            |
|                             |
| James K.Hunt                |
|                             |
| /s/ Robert R.Lusardi        |  | Director                                                         |  | March 21,2005            |
|                             |
| Robert R.Lusardi            |
|                             |
| /s/ Jay H. Shidler          |  | Director                                                         |  | March 21,2005            |
|                             |
| Jay H.Shidler               |
|                             |
|         |  | Director                                                         |  |      |
|                             |
| John Ward,III               |
|                             |

86

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