UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-32307

 

Primus Guaranty, Ltd.

(Exact name of registrant as specified in its charter)

Bermuda (State or other jurisdiction of incorporation or organization)		98-0402357 (I.R.S. Employer Identification No.)

Clarendon House
2 Church Street
Hamilton HM 11, Bermuda
(Address of principal executive offices, including zip code)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non- accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of November 2, 2009, the number of shares outstanding of the issuer’s common shares, $0.08 par value, was 39,494,314.

 

 

Primus Guaranty, Ltd.

Form 10-Q

For the three months ended September 30, 2009

INDEX

Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Financial Condition as of September 30, 2009 (Unaudited) and December 31, 2008			3
Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2009 and 2008			4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2009 and 2008			5
Condensed Consolidated Statements of Equity (Deficit) for the nine months ended September 30, 2009 (Unaudited) and year ended December 31, 2008			6
Notes to Condensed Consolidated Financial Statements (Unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			34
Cautionary Statement Regarding Forward Looking Information			57
Item 3. Quantitative and Qualitative Disclosures about Market Risk			58
Item 4. Controls and Procedures			59
Part II. Other Information
Item 1. Legal Proceedings			60
Item 1A. Risk Factors			60
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			60
Item 6. Exhibits			60
Signatures			61
Exhibit 12
Exhibit 31.1
Exhibit 31.2
Exhibit 32

Part I. Financial Information

Item 1.		Financial Statements

Primus Guaranty, Ltd.

Condensed Consolidated Statements of Financial Condition
(in thousands except share amounts)

		September 30,				December 31,
		2009				2008
		(unaudited)
Assets
Cash and cash equivalents		$	568,684			$	280,912
Investments			178,779				486,870
Accrued interest receivable			1,763				3,704
Accrued premiums and receivables on credit swaps			2,383				2,764
Unrealized gain on credit swaps, at fair value			670				—
Fixed assets and software costs, net			2,525				3,308
Debt issuance costs, net			4,896				6,153
Goodwill			3,922				—
Intangible assets, net			4,290				—
Other assets			6,047				10,520
Total assets		$	773,959			$	794,231
Liabilities and Equity (deficit)
Liabilities
Accounts payable and accrued expenses		$	2,592			$	1,737
Accrued compensation			4,374				1,768
Unrealized loss on credit swaps, at fair value			1,027,166				2,173,461
Payable to broker for securities transactions			20,433				—
Payable for credit events			840				3,186
Long-term debt			252,910				317,535
Other liabilities			7,532				979
Total liabilities			1,315,847				2,498,666
Commitments and contingencies
Equity (deficit)
Common shares, $0.08 par value, 62,500,000 shares authorized, 39,737,639 and 40,781,538 shares issued and outstanding at September 30, 2009 and December 31, 2008			3,179				3,263
Additional paid-in capital			284,003				281,596
Accumulated other comprehensive income (loss)			1,272				908
Retained earnings (deficit)			(923,444	)			(2,088,723	)
Total shareholders’ equity (deficit) of Primus Guaranty, Ltd.			(634,990	)			(1,802,956	)
Preferred securities of subsidiary			93,102				98,521
Total equity (deficit)			(541,888	)			(1,704,435	)
Total liabilities and equity (deficit)		$	773,959			$	794,231

See accompanying notes.

Primus Guaranty, Ltd.

Condensed Consolidated Statements of Operations
(in thousands except per share amounts)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(unaudited)								(unaudited)
Revenues
Net credit swap revenue (loss)		$	471,835			$	(387,683	)		$	1,154,599			$	(780,308	)
Asset management and advisory fees			1,270				1,096				2,076				3,276
Interest income			1,218				6,212				4,716				21,725
Gain on retirement of long-term debt			643				—				39,591				—
Impairment losses on available-for-sale investments			—				—				(761	)			—
Other income (loss)			548				(140	)			3,022				(267	)
Total revenues (losses)			475,514				(380,515	)			1,203,243				(755,574	)
Expenses
Compensation and employee benefits			6,418				1,739				15,699				13,894
Professional and legal fees			2,253				796				5,631				3,100
Depreciation and amortization			344				336				853				999
Technology and data			847				854				2,397				2,865
Interest expense			2,026				3,974				7,094				12,838
Other			1,352				596				3,398				3,219
Total expenses			13,240				8,295				35,072				36,915
Income (loss) before provision for income taxes			462,274				(388,810	)			1,168,171				(792,489	)
Provision for income taxes			5				12				152				61
Net income (loss)			462,269				(388,822	)			1,168,019				(792,550	)
Distributions on preferred securities of subsidiary			726				1,397				2,740				5,144
Net income (loss) available to common shares		$	461,543			$	(390,219	)		$	1,165,279			$	(797,694	)
Income (loss) per common share:
Basic		$	11.54			$	(8.63	)		$	28.82			$	(17.65	)
Diluted		$	11.14			$	(8.63	)		$	28.26			$	(17.65	)
Weighted average common shares outstanding:
Basic			39,999				45,230				40,430				45,187
Diluted			41,414				45,230				41,238				45,187

See accompanying notes.

Primus Guaranty, Ltd.

Condensed Consolidated Statements of Cash Flows
(in thousands)

		Nine Months Ended
		September 30,
		2009				2008
		(unaudited)
Cash flows from operating activities
Net income (loss) available to common shares		$	1,165,279			$	(797,694	)
Distributions on preferred securities of subsidiary			2,740				5,144
Net income (loss)			1,168,019				(792,550	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Non-cash items included in net income (loss):
Depreciation and amortization			853				999
Share-based compensation			3,275				3,522
Net unrealized (gains) losses on credit swaps			(1,146,965	)			769,675
Net amortization of premium and discount on securities			(562	)			(1,552	)
Gain on retirement of long-term debt			(39,591	)			—
Impairment losses on available-for-sale investments			761				—
Amortization of debt issuance costs			192				234
Loss on disposal of assets			286				—
Increase (decrease) in cash resulting from changes in:
Accrued interest receivable			1,941				3,664
Accrued premiums and receivables on credit swaps			381				1,575
Other assets			601				930
Trading account assets			3,715				—
Accounts payable and accrued expenses			(572	)			(434	)
Accrued compensation			2,606				(3,028	)
Payable for credit events			(2,346	)			84,491
Accrued premiums and payables on credit and other swaps			—				(1,770	)
Restructuring liabilities			—				(1,709	)
Other liabilities			322				(471	)
Net cash provided by (used in) operating activities			(7,084	)			63,576
Cash flows from investing activities
Business acquisition			(3,208	)			—
Fixed asset purchases and capitalized software costs			(97	)			(702	)
Payments received from CLO investments			94				2,798
Purchases of available-for-sale investments			(154,559	)			(1,424,539	)
Maturities and sales of available-for-sale investments			479,627				1,420,051
Net cash provided by (used in) investing activities			321,857				(2,392	)
Cash flows from financing activities
Retirement of long-term debt			(19,052	)			—
Purchase and retirement of common shares			(5,463	)			(201	)
Purchase of preferred securities of subsidiary			(908	)			—
Net preferred distributions of subsidiary			(2,740	)			(5,144	)
Net cash used in financing activities			(28,163	)			(5,345	)
Net effect of exchange rate changes on cash			168				(169	)
Net increase in cash			286,778				55,670
Cash and cash equivalents at beginning of period			280,912				242,665
Cash and cash equivalents at end of period		$	567,690			$	298,335
Supplemental disclosures
Cash paid for interest		$	8,292			$	13,038
Cash paid for taxes		$	128			$	38

See accompanying notes.

Primus Guaranty, Ltd.

Condensed Consolidated Statements of Equity (Deficit)
(in thousands)

		Nine Months Ended				Year Ended
		September 30, 2009				December 31, 2008
		(unaudited)
Common shares
Balance at beginning of period		$	3,263			$	3,603
Shares purchased and retired			(158	)			(359	)
Shares vested under employee compensation plans			74				19
Balance at end of period			3,179				3,263
Additional paid-in capital
Balance at beginning of period			281,596				280,224
Common shares purchased and retired			(4,810	)			(3,220	)
Shares vested under employee compensation plans			2,706				4,592
Preferred shares purchased by subsidiary			4,511				—
Balance at end of period			284,003				281,596
Accumulated other comprehensive income (loss)
Balance at beginning of period			908				(4,712	)
Foreign currency translation adjustments			168				(447	)
Change in unrealized holding gains (losses) on available-for-sale securities			196				6,067
Balance at end of period			1,272				908
Retained earnings (deficit)
Balance at beginning of period			(2,088,723	)			(372,577	)
Net income (loss)			1,168,019				(1,709,504	)
Distributions on preferred securities of subsidiary			(2,740	)			(6,642	)
Balance at end of period			(923,444	)			(2,088,723	)
Total shareholders’ equity (deficit) of Primus Guaranty, Ltd.			(634,990	)			(1,802,956	)
Preferred securities of subsidiary
Balance at beginning of period			98,521				98,521
Net purchase of preferred shares			(5,419	)			—
Balance at end of period			93,102				98,521
Total equity (deficit) at end of period		$	(541,888	)		$	(1,704,435	)

See accompanying notes.

Primus Guaranty, Ltd.

1. Organization and Basis of Presentation

Primus Guaranty, Ltd., together with its consolidated subsidiaries (“Primus Guaranty” or “the Company”), is a Bermuda holding company that conducts business currently through its two principal operating subsidiaries, Primus Asset Management, Inc. (“Primus Asset Management”) and Primus Financial Products, LLC, together with its subsidiary (“Primus Financial”).

Primus Asset Management, a Delaware corporation, acts as an investment manager to affiliated companies and third party entities. It also manages the credit swap and cash investment portfolios of its affiliate, Primus Financial. On July 9, 2009, Primus Asset Management completed the acquisition of CypressTree Investment Management, LLP and its subsidiaries (“CypressTree”). CypressTree operates as a wholly owned subsidiary of Primus Asset Management. See note 12 of notes to condensed consolidated financial statements for further discussion of this acquisition. Following the CypressTree acquisition, Primus Asset Management manages eight collateralized loan obligations (“CLOs”). CLOs issue securities backed by a diversified pool of primarily below investment grade rated senior secured loans of corporations. Additionally, Primus Asset Management manages five collateralized swap obligations (“CSOs”) and separately managed accounts on behalf of third parties. CSOs issue securities backed by one or more credit swaps sold against a diversified pool of investment grade corporate or sovereign issuers. Primus Asset Management receives fees for its investment management services to these investment vehicles. In general, such management fees are calculated based on percentage of assets under management, subject to applicable contractual terms. As of September 30, 2009, Primus Asset Management managed Primus Financial’s credit swap portfolio of $19.6 billion in notional amount and CLO and CSO assets of approximately $3.7 billion. Primus Asset Management also has entered into a Services Agreement with its affiliates, whereby it provides services to its affiliates including management, consulting and information technology.

Primus Financial is a Delaware limited liability company that, as a credit derivative product company (“CDPC”), was established to sell credit swaps primarily to global financial institutions and major credit swap dealers, referred to as counterparties, against primarily investment grade credit obligations of corporate and sovereign issuers. In exchange for a fixed quarterly premium, Primus Financial has agreed, upon the occurrence of a defined credit event (e.g., bankruptcy, failure to pay or restructuring) affecting a designated issuer, referred to as a Reference Entity, to pay to its counterparty an amount determined through industry-sponsored auctions equivalent to the notional amount of the credit swap less the auction-determined recovery price of the underlying debt obligation. Primus Financial may elect to acquire the underlying security in the related auction or otherwise and seek to sell such obligation at a later date. Credit swaps sold by Primus Financial on a single specified Reference Entity are referred to as “single name credit swaps.”

Primus Financial also has sold credit swaps referencing portfolios containing obligations of multiple Reference Entities, which are referred to as “tranches.” Additionally, Primus Financial has sold credit swaps on asset-backed securities, which are referred to as “CDS on ABS.” These asset-backed securities are referenced to residential mortgage-backed securities. Defined credit events related to CDS on ABS may include any or all of the following: failure to pay principal, write-down in the reference obligation and ratings downgrades to CCC/Caa2 (Standard & Poor’s Ratings Services, or “S&P”/ Moody’s Investors Service Inc., or “Moody’s”) or below of the reference obligation.

As announced earlier in the year, one of the Company’s 2009 business priorities and initiatives is to amortize Primus Financial’s credit swap portfolio. Under the amortization model, Primus Financial’s existing credit swap contracts will expire at maturity (unless terminated early) and it is not expected that new credit swaps will be added to its portfolio. In connection with a credit mitigation transaction with a counterparty during the third quarter of 2009, Primus Financial Products, LLC formed a new wholly owned subsidiary. See note 6 of notes to condensed consolidated financial statements for further discussion.

Primus Re, Ltd. (“Primus Re”), a subsidiary, is a Bermuda company that is a financial guaranty insurance company and is registered as a Class 3 insurer under the Bermuda Insurance Act 1978, as amended, and related regulations, or the Bermuda Insurance Act. Primus Re’s business is to act as a conduit, or transformer, between parties interested in buying or selling protection in insurance form and other parties interested in assuming the opposite risk position in the form of credit swaps. Primus Re has been inactive since 2007.

Primus Guaranty (UK) Ltd. (“PGUK”), a subsidiary, has been established in England to expand the Company’s presence and further develop its business and relationships across Europe. PGUK is authorized by the United Kingdom’s Financial Services Authority.

The accompanying unaudited condensed consolidated financial statements of Primus Guaranty, Ltd. have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for any interim period are not necessarily indicative of the results for a full year. The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances have been eliminated.

The condensed consolidated financial statements represent a single reportable segment and are presented in U.S. dollar equivalents. During the periods presented, the Company’s credit swap activities were conducted in U.S. dollars and euros.

Certain prior year amounts have been reclassified to conform to current year presentation. There was no effect on net income (loss) available to common shares as a result of these reclassifications. Foreign currency revaluation loss of $140 thousand and $267 thousand in the condensed consolidated statements of operations during the three and nine months ended September 30, 2008, respectively, has been reclassified to “Revenues — Other income (loss).”

2. Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Codification (“ASC” or “Codification”) which becomes the source of authoritative GAAP recognized by the FASB. Rules and interpretive releases of the U.S. Securities and Exchange Commission (“SEC”) under authority of the U.S. federal securities law are also sources of authoritative GAAP for SEC registrants. This guidance, which is incorporated in ASC Topic 105, Generally Accepted Accounting Principles, was adopted by the Company on July 1, 2009. As of the effective date, the Codification supersedes all pre-existing non-SEC accounting and reporting standards. Under the Codification, the FASB now will issue new standards in the form of Accounting Standards Updates (“ASUs”).

In December 2007, the FASB issued authoritative guidance that requires the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition); establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; requires expensing of most transaction and restructuring costs; and requires the acquirer to disclose to investors and other users all of the information needed to evaluate and understand the nature and financial effect of the business combination. In April 2009, the FASB issued authoritative guidance that amends and clarifies the accounting for acquired contingencies. This guidance, which was incorporated into ASC Topic 805, Business Combinations, was adopted by the Company as of January 1, 2009 and is applicable to business combinations that close on or after January 1, 2009. Primus Asset Management’s acquisition of CypressTree, which was completed in the third quarter of 2009, is accounted for under the provisions of ASC Topic 805, Business Combinations. See note 12 of notes to condensed consolidated financial statements for further discussion of this acquisition.

In December 2007, the FASB issued authoritative guidance that requires reporting entities to present noncontrolling interests as a separate component of equity (as opposed to liability or mezzanine) in the condensed consolidated statements of financial condition. It also requires that the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the condensed consolidated statements of operations. The presentation and disclosure requirements under this guidance are to be applied retrospectively to all periods presented. Based on the accounting guidance, the preferred shares issued by Primus Financial meets the definition of a noncontrolling interest. This guidance, which was incorporated into ASC Topic 810, Consolidation, was adopted by the Company on January 1, 2009 and resulted in the preferred securities of subsidiary to be reclassified from mezzanine to equity on the condensed consolidated statements of financial condition. This reclassification had no impact on the Company’s net income (loss) available to common shares or cash flows, but did result in certain changes in the presentation of the distributions on preferred securities of subsidiary in the Company’s condensed consolidated statements of operations and condensed consolidated statements of cash flows.

In March 2008, the FASB issued authoritative guidance that is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. This guidance applies to all derivative instruments and non-derivative hedging instruments and all hedged items designated and qualifying as hedges. This guidance, which was incorporated in ASC Topic 815, Derivatives and Hedging, was adopted by the Company on January 1, 2009. The adoption of the provisions of this guidance did not affect the Company’s financial condition, results of operations or cash flows.

In December 2008, the FASB issued authoritative guidance that requires enhanced disclosures about transfers of financial assets and interests in variable interest entities (“VIEs”). Effective January 1, 2009, the Company adopted the provisions of this guidance and the adoption did not affect the Company’s financial condition, results of operations or cash flows.

In January 2009, the FASB issued authoritative guidance that amends and eliminates the requirement that a holder’s best estimate of cash flows should be based upon those that “a market participant” would use. Instead, the guidance requires that an other-than-temporary impairment be recognized as a realized loss through earnings when it is “probable” there has been an adverse change in the holder’s estimated cash flows from the cash flows previously projected. Effective January 1, 2009, the Company adopted the provisions of this guidance and the adoption did not affect the Company’s financial condition, results of operations or cash flows.

In April 2009, the FASB also issued authoritative guidance that amends the other-than-temporary impairment guidance for debt securities and improves the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. Effective in the second quarter of 2009, the Company adopted the provisions of this guidance. The adoption did not affect the Company’s financial condition, results of operations or cash flows.

In April 2009, the FASB also issued authoritative guidance that provides additional guidance for estimating fair value and includes guidance on identifying circumstances that indicate a transaction is not orderly. Effective in the second quarter of 2009, the Company adopted the provisions of this guidance. The adoption did not affect the Company’s financial condition, results of operations or cash flows.

In April 2009, the FASB issued authoritative guidance that requires that the fair value disclosures be included in financial statements prepared for interim periods. Effective in the second quarter of 2009, the Company adopted the provisions of this guidance and the adoption did not affect the Company’s financial condition, results of operations or cash flows.

In May 2009, the FASB issued authoritative guidance that establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. This guidance, which was incorporated into ASC Topic 855, Subsequent Events, was adopted by the Company in the second quarter of 2009. The adoption of the provisions of this guidance did not have a material effect on the Company’s financial condition, results of operations or cash flows. The Company evaluated events or transactions that occurred after September 30, 2009 up through November 6, 2009, the date these financial statements were issued. See note 14 of notes to condensed consolidated financial statements for disclosure of subsequent events.

In June 2009, the FASB issued authoritative guidance that is intended to improve financial reporting by enterprises involved with a VIE. This guidance requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. This guidance is effective for the first annual reporting period beginning after November 15, 2009, with early adoption prohibited. The Company is currently evaluating the requirements and based on this new accounting standard; the adoption may have a significant impact on its condensed consolidated financial statements as the Company may be required to consolidate certain CLOs that are not currently consolidated under the current accounting standards. This new accounting standard will be effective for the Company on January 1, 2010.

In August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair Value (“ASU 2009-05”). This update provides amendments to ASC Topic 820, Fair Value Measurements and Disclosures for the fair value measurement of liabilities. Effective in the third quarter of 2009, the Company adopted the guidance of ASU 2009-05. The adoption of ASU 2009-05 did not have a material effect on the Company’s financial condition, results of operations or cash flows.

3. Investments

The Company’s management determines the appropriate classification of securities at the time of purchase which are recorded in the condensed consolidated statements of financial condition on the trade date. At the time of purchase, debt and equity securities are classified as available-for-sale, held-to-maturity or trading. Available-for-sale investments include U.S. government agency obligations (including government-sponsored enterprises) rated AAA and Aaa by the respective ratings agencies, commercial paper rated A-1 and P-1 by the respective ratings agencies, corporate debt securities and the Company’s CLO investments. Available-for-sale investments are carried at fair value with the unrealized gains or losses reported in accumulated other comprehensive income (loss) as a separate component of shareholders’ equity (deficit). Available-for-sale investments have maturities at time of purchase greater than 90 days. Held-to-maturity investments include corporate notes and a certificate of deposit and are recorded at amortized cost, which are those securities that the Company has the intent and ability to hold until maturity. Trading account investments include corporate debt securities and are carried at fair value, with unrealized gains or losses included in the “Revenues — Other income (loss)” caption in the condensed consolidated statements of operations.

The following tables summarize the composition of the Company’s investments at September 30, 2009 and December 31, 2008 (in thousands):

		September 30, 2009
		Amortized				Unrealized				Unrealized				Estimated
		Cost				Gains				Losses				Fair Value
Available-for-sale:
Corporate debt securities		$	140,619			$	1,693			$	(327	)		$	141,985
Collateralized loan obligations			204				—				—				204
Total available-for-sale			140,823				1,693				(327	)			142,189
Held-to-maturity:
Corporate notes			36,196				—				—				36,196
Certificate of deposit			169												169
Total held-to-maturity			36,365				—				—				36,365
Trading:
Corporate debt securities			225				—				—				225
Total trading			225				—				—				225
Total investments		$	177,413			$	1,693			$	(327	)		$	178,779

		December 31, 2008
		Amortized				Unrealized				Unrealized				Estimated
		Cost				Gains				Losses				Fair Value
Available-for-sale:
U.S. government agency obligations		$	458,909			$	2,016			$	(39	)		$	460,886
Collateralized loan obligations			791				—				—				791
Corporate debt securities			22,076				84				(912	)			21,248
ABS			5				—				—				5
Total available-for-sale			481,781				2,100				(951	)			482,930
Trading:
Corporate debt securities			3,940				—				—				3,940
Total trading			3,940				—				—				3,940
Total investments		$	485,721			$	2,100			$	(951	)		$	486,870

The following tables summarize the fair value of investments that have been in a continuous unrealized loss position for less than 12 months and for 12 months or more at September 30, 2009 and December 31, 2008 (in thousands):

		September 30, 2009
		Securities with Unrealized Losses
		Less than 12 Months								12 Months or More								Total
						Gross								Gross								Gross
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
Corporate debt securities		$	35,861			$	(95	)		$	2,619			$	(232	)		$	38,480			$	(327	)
Total		$	35,861			$	(95	)		$	2,619			$	(232	)		$	38,480			$	(327	)

		December 31, 2008
		Securities with Unrealized Losses
		Less than 12 Months								12 Months or More								Total
						Gross								Gross								Gross
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
U.S. government agency obligations		$	24,968			$	(39	)		$	—			$	—			$	24,968			$	(39	)
Corporate debt securities			17,364				(912	)			—				—				17,364				(912	)
Total		$	42,332			$	(951	)		$	—			$	—			$	42,332			$	(951	)

The Company makes an assessment to determine whether unrealized losses reflect declines in value of securities that are other-than-temporarily impaired. The Company considers many factors, including the length of time and significance of the decline in fair value of the investment; the Company’s intent to sell the investment or if it is more likely than not it will be required to sell the investment before recovery in fair value; recent events specific to the issuer or industry; credit ratings and asset quality of collateral structure; and any significant changes in estimated cash flows of the investment. If the Company, based on its evaluation, determines that the impairment is other-than-temporary, the carrying value of the security is written down to fair value and the unrealized loss is recognized through a charge to earnings in the condensed consolidated statements of operations.

As a result of defaults and downgrades in the credit ratings of the underlying collateral loans, the level of subordination in the investment and reduced estimated future cash flows, the Company determined that there was an other-than-temporary impairment in the fair value of the subordinated notes representing the Company’s CLO investments as of June 30, 2009. There were no additional impairments recognized during the three months ended September 30, 2009. During the nine months ended September 30, 2009, the Company recorded impairment losses on its CLO investments, all of which related to credit losses of approximately $0.7 million in the condensed consolidated statements of operations. These CLO investments have been carried at zero since June 30, 2009; therefore, the Company no longer has exposure to future realized losses on these CLO investments. As a result of the CypressTree acquisition, the Company has recorded an additional investment in a CLO of approximately $0.2 million. As of September 30, 2009, approximately 97% of the corporate debt securities will mature before September 2014. The corporate notes are scheduled to mature in March 2013. The CLO investments are scheduled to mature between 2016 and 2021, although the actual maturity of each may be sooner.

4. Net Credit Swap Revenue (Loss) and Portfolio

Overview

Net credit swap revenue (loss) as presented in the condensed consolidated statements of operations comprises changes in the fair value of credit swaps, realized gains or losses on the termination of credit swaps sold before their stated maturity, realized losses on credit events and premium income or expense. The realization of gains or losses on the termination of credit swaps or credit events generally will result in a reduction in unrealized gains or losses and accrued premium at the point in time realization occurs.

Credit swaps are derivative transactions that obligate one party to the transaction (the “Seller”) to pay an amount to the other party to the transaction (the “Buyer”) should an unrelated third party (the Reference Entity), specified in the contract be subject to a defined credit event. The amount to be paid by the Seller following adoption of an industry-wide auction protocol generally will be the difference between the current market value of a defined obligation of the Reference Entity and the notional amount of the transaction (called cash settlement). In certain cases, the Seller may elect to purchase the defined obligation of the Reference Entity in the auction or otherwise and hold such obligation seeking to achieve a greater recovery than implied by such auction. In exchange for taking the risk of the contract, the Seller will receive a fixed premium for the term of the contract (or until the occurrence of a defined credit event). The fixed premium generally is paid quarterly in arrears over the term of the transaction. Premium income is recognized ratably over the life of the transaction as a component of net credit swap revenue (loss). When the Company purchases credit swaps from its counterparties, the Company pays fixed premiums over the term of the contract. Premium expense is recognized ratably over the life of the transaction as a component of net credit swap revenue (loss).

All credit swap transactions entered into between the Buyer and the Seller are subject to an International Swaps and Derivatives Association, Inc. Master Agreement (“ISDA Master Agreement”) executed by both parties. The ISDA Master Agreement allows for the aggregation of the market exposures and termination of all transactions between the Buyer and Seller in the event a default (as defined in the ISDA Master Agreement) occurs in respect of either party.

The primary risks inherent in the Company’s activities are (a) where the Company is a Seller, that Reference Entities specified in its credit swap transactions will experience credit events that will require the Company to make payments to the Buyers of the transactions. Defined credit events may include any or all of the following: bankruptcy, failure to pay, repudiation or moratorium, and modified or original restructuring, (b) where the Company is a Buyer of a credit swap and a defined credit event occurs, the Seller fails to make payment to the Company, and (c) that Buyers of the transactions from the Company will default on their required premium payments. Defined credit events related to the Company’s CDS on ABS may include any or all of the following: failure to pay principal, write-downs in the reference obligations (“principal write-downs”) and ratings downgrades to CCC/Caa2 (S&P/Moody’s) or below of the reference obligation. Upon the occurrence of a defined credit event, a counterparty has the right to present the underlying ABS, in whole or part, to Primus Financial, in exchange for a cash payment by Primus Financial, up to the notional amount of the credit swap (“Physical Settlement”). If there is a principal write-down of the ABS, a counterparty may claim for cash compensation for the amount of the principal write-down, up to the notional value of the credit swap without presentation of the ABS. See note 6 of notes to condensed consolidated financial statements for further discussion of credit events.

The Company may elect to terminate a credit swap through a credit mitigation transaction before its stated maturity in one of two ways. The Company may negotiate an agreed termination with the original counterparty (an unwind). Alternatively, the Company may negotiate an assignment and novation of its rights and obligations under the credit swap to a third party (an assignment). In the event of an unwind or assignment, the Company pays or receives a cash settlement negotiated with the counterparty or assignee, based on the fair value of the credit swap contract and the accrued premium on the swap contract at the time of negotiation. The amounts the Company pays or receives are recorded as a realization of fair value and as a realization of accrued premiums in the period in which the termination occurs.

The Company carries its credit swaps on its condensed consolidated statements of financial condition at their fair value. Changes in the fair value of the Company’s credit swap portfolio are recorded as unrealized gains or losses as a component of net credit swap revenue (loss) in the Company’s condensed consolidated statements of operations. If a credit swap has an increase or decline in fair value during a period, the increase will add to the Company’s net credit swap revenue and the decline will subtract from the Company’s net credit swap revenue for that period, respectively. Changes in the fair value of the Company’s credit swap portfolio are predominantly a function of the notional amount and composition of the portfolio and prevailing market credit swap premiums for comparable credit swaps and nonperformance risk adjustment. When the Company is a Seller of credit swaps, it generally has held the credit swaps it has sold to maturity, at which point, assuming no defined credit event has occurred, the cumulative unrealized gains and losses on each credit swap would equal zero.

Primus Financial has entered into ISDA Master Agreements with counterparties, which are generally financial institutions. In general, the Company aggregates fair values of individual credit swaps by counterparty for presentation on the Company’s condensed consolidated statements of financial condition. If the aggregate total of fair values with a counterparty is a net gain, the total is recorded as a component of unrealized gains on credit swaps, at fair value in the condensed consolidated statements of financial condition. If the aggregate total of fair values with a counterparty is a net loss, the total is recorded as a component of unrealized losses on credit swaps, at fair value in the condensed consolidated statements of financial condition.

For the nine months ended September 30, 2009, two individual counterparties generated greater than 10% of the Company’s consolidated net premium revenue. Primus Financial’s top counterparty and top five counterparties represented approximately 15% and 45%, respectively, of the Company’s credit swap portfolio in notional amounts outstanding at September 30, 2009.

Consolidated Net Credit Swap Revenue (Loss) and Credit Swap Portfolio Information

The following table presents the components of consolidated net credit swap revenue (loss) for the three and nine months ended September 30, 2009 and 2008 (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Net premium income		$	21,885			$	24,378			$	66,588			$	78,928
Net realized losses			(21,500	)			(84,415	)			(58,953	)			(89,466	)
Net change in unrealized gains (losses)			471,450				(327,646	)			1,146,964				(769,770	)
Net credit swap revenue (loss)		$	471,835			$	(387,683	)		$	1,154,599			$	(780,308	)

The following table represents the consolidated gross notional amount and fair value of open credit swap transactions entered into with third parties at September 30, 2009 and December 31, 2008 (in thousands). Transactions with Lehman Brothers Special Financing Inc. (“LBSF”) are included in the following table:

		September 30,				December 31,
		2009				2008
Gross Notional Amounts:
Credit swaps sold-single name		$	14,589,676			$	17,477,946
Credit swaps sold-tranche			5,000,000				5,000,000
CDS on ABS			38,682				67,654
Credit swaps purchased-single name			(11,740	)			(11,740	)
Fair Value:
Asset			670				—
Liability			1,027,166				2,173,461

“Asset” in the table above represents unrealized gains on credit swaps while “Liability” represents unrealized losses on credit swaps. The Liability at September 30, 2009 and December 31, 2008 includes a favorable nonperformance risk adjustment of approximately $283.8 million and $1.3 billion, respectively, as further discussed in note 5 of notes to condensed consolidated financial statements. All credit swaps are subject to netting arrangements that have been contractually established independently by Primus Financial with counterparties under an ISDA Master Agreement. In the table above, the notional amounts of the credit swap contracts are presented on a gross basis and the fair values of such contracts are netted by counterparty.

The tables below summarize by credit rating of Reference Entities and of counterparties, the notional amounts and unrealized gain or (loss) for fair values of credit swap transactions outstanding as of September 30, 2009 and December 31, 2008 (in thousands). Transactions with LBSF are included in the following tables and are noted as with a non rated counterparty. See note 7 of notes to condensed consolidated financial statements for further discussion.

		September 30, 2009								December 31, 2008
		Notional				Fair				Notional				Fair
Moody’s Rating Category		Amount				Value				Amount				Value
By Single Name Reference Entity/Tranche
Credit Swaps Sold-Single Name:
Aaa		$	190,520			$	(940	)		$	525,812			$	(19,442	)
Aa			2,129,760				(20,019	)			2,815,912				(83,984	)
A			5,075,800				(23,084	)			5,825,968				(162,262	)
Baa			5,596,032				(40,968	)			6,629,514				(321,765	)
Ba			910,244				(32,764	)			1,168,506				(128,516	)
B			307,160				(16,416	)			253,422				(30,355	)
Caa			70,000				(1,680	)			112,812				(47,423	)
Ca			139,000				(60,785	)			105,000				(48,506	)
C			160,160				(115,811	)			35,000				(3,189	)
D			11,000				(5,725	)			6,000				(782	)
Total		$	14,589,676			$	(318,192	)		$	17,477,946			$	(846,224	)
Credit Swaps Sold-Tranche:
Aaa		$	1,200,000			$	(36,952	)		$	2,700,000			$	(495,997	)
Aa			1,700,000				(197,675	)			1,350,000				(386,705	)
A			800,000				(111,279	)			200,000				(73,091	)
Baa			550,000				(97,972	)			600,000				(231,999	)
Ba			300,000				(60,435	)			—				—
B			300,000				(89,504	)			150,000				(88,725	)
Ca			150,000				(86,251	)			—				—
Total		$	5,000,000			$	(680,068	)		$	5,000,000			$	(1,276,517	)
CDS on ABS:
A		$	—			$	—			$	5,000			$	(2,530	)
Baa			3,682				(2,572	)			15,000				(11,089	)
Ba			—				—				5,000				(3,607	)
C			35,000				(29,550	)			42,654				(36,193	)
Total		$	38,682			$	(32,122	)		$	67,654			$	(53,419	)
Credit Swaps Purchased-Single Name:
A		$	(4,120	)		$	88			$	(4,120	)		$	536
Baa			—				—				(3,580	)			474
Ba			—				—				(4,040	)			1,689
Ca			(7,620	)			3,798				—				—
Total		$	(11,740	)		$	3,886			$	(11,740	)		$	2,699

		September 30, 2009								December 31, 2008
		Notional				Fair				Notional				Fair
Moody’s Rating Category		Amount				Value				Amount				Value
By Counterparty Buyer / (Seller)
Credit Swaps Sold-Single Name:
Aaa		$	10,000			$	(131	)		$	2,411,228			$	(94,793	)
Aa			10,789,508				(231,682	)			11,930,958				(573,250	)
A			2,430,768				(42,411	)			1,746,917				(100,189	)
Baa			80,000				(97	)			—				—
Non rated			1,279,400				(43,871	)			1,388,843				(77,992	)
Total		$	14,589,676			$	(318,192	)		$	17,477,946			$	(846,224	)
Credit Swaps Sold-Tranche:
Aa		$	4,550,000			$	(601,053	)		$	4,550,000			$	(1,132,176	)
A			450,000				(79,015	)			450,000				(144,341	)
Total		$	5,000,000			$	(680,068	)		$	5,000,000			$	(1,276,517	)
CDS on ABS:
Aa		$	5,000			$	(4,179	)		$	43,494			$	(32,519	)
A			28,682				(23,546	)			19,160				(17,093	)
Non rated			5,000				(4,397	)			5,000				(3,807	)
Total		$	38,682			$	(32,122	)		$	67,654			$	(53,419	)
Credit Swaps Purchased-Single Name:
Aa		$	(11,740	)		$	3,886			$	(11,740	)		$	2,699
Total		$	(11,740	)		$	3,886			$	(11,740	)		$	2,699

		September 30, 2009								December 31, 2008
		Notional				Fair				Notional				Fair
S&P Rating Category		Amount				Value				Amount				Value
By Single Name Reference Entity/Tranche
Credit Swaps Sold-Single Name:
AAA		$	395,520			$	(9,205	)		$	555,812			$	(19,594	)
AA			1,611,400				(9,750	)			2,276,042				(78,128	)
A			6,083,600				(30,509	)			6,984,696				(200,543	)
BBB			5,087,032				(36,149	)			6,427,687				(336,933	)
BB			724,444				(31,343	)			722,933				(71,601	)
B			253,560				(12,095	)			289,246				(71,219	)
CCC			108,960				(5,950	)			180,530				(64,235	)
CC			290,160				(170,750	)			—				—
C			24,000				(6,716	)			35,000				(3,189	)
D			11,000				(5,725	)			6,000				(782	)
Total		$	14,589,676			$	(318,192	)		$	17,477,946			$	(846,224	)
Credit Swaps Sold-Tranche:
AAA		$	1,300,000			$	(47,105	)		$	3,600,000			$	(738,361	)
AA			1,600,000				(187,521	)			450,000				(144,341	)
A			400,000				(46,477	)			100,000				(37,107	)
BBB			950,000				(162,775	)			500,000				(187,384	)
BB			200,000				(35,700	)			200,000				(80,599	)
B			200,000				(56,447	)			100,000				(60,460	)
CCC			200,000				(57,792	)			50,000				(28,265	)
C			150,000				(86,251	)			—				—
Total		$	5,000,000			$	(680,068	)		$	5,000,000			$	(1,276,517	)
CDS on ABS:
BBB		$	8,682			$	(6,969	)		$	15,000			$	(10,828	)
BB			—				—				10,000				(6,727	)
B			5,000				(4,179	)			10,000				(6,597	)
CCC			15,000				(12,034	)			10,000				(7,747	)
CC			10,000				(8,940	)			22,654				(21,520	)
Total		$	38,682			$	(32,122	)		$	67,654			$	(53,419	)
Credit Swaps Purchased-Single Name:
A		$	(4,120	)		$	88			$	(4,120	)		$	536
BBB			—				—				(7,620	)			2,163
CC			(4,040	)			2,437				—				—
C			(3,580	)			1,361				—				—
Total		$	(11,740	)		$	3,886			$	(11,740	)		$	2,699

		September 30, 2009								December 31, 2008
		Notional				Fair				Notional				Fair
S&P Rating Category		Amount				Value				Amount				Value
By Counterparty Buyer / (Seller)
Credit Swaps Sold-Single Name:
AA		$	3,660,040			$	(57,998	)		$	7,620,037			$	(350,248	)
A			9,650,236				(216,323	)			8,469,066				(417,984	)
Non rated			1,279,400				(43,871	)			1,388,843				(77,992	)
Total		$	14,589,676			$	(318,192	)		$	17,477,946			$	(846,224	)
Credit Swaps Sold-Tranche:
AA		$	2,750,000			$	(323,961	)		$	2,850,000			$	(640,545	)
A			1,800,000				(277,092	)			2,150,000				(635,972	)
BBB			450,000				(79,015	)			—				—
Total		$	5,000,000			$	(680,068	)		$	5,000,000			$	(1,276,517	)
CDS on ABS:
A		$	33,682			$	(27,725	)		$	62,654			$	(49,612	)
Non rated			5,000				(4,397	)			5,000				(3,807	)
Total		$	38,682			$	(32,122	)		$	67,654			$	(53,419	)
Credit Swaps Purchased-Single Name:
A		$	(11,740	)		$	3,886			$	(11,740	)		$	2,699
Total		$	(11,740	)		$	3,886			$	(11,740	)		$	2,699

The table below shows the geographical distribution of the credit swap portfolio by domicile of the Reference Entity and domicile of the counterparty (including transactions with LBSF, as discussed in note 7), as of September 30, 2009 and December 31, 2008 (in thousands):

		September 30, 2009								December 31, 2008
		Notional				Fair				Notional				Fair
Country of Domicile		Amount				Value				Amount				Value
Credit Swaps Sold-Single Name
By Reference Entity:
North America		$	7,472,260			$	(255,324	)		$	9,135,739			$	(481,009	)
Europe			6,426,416				(55,808	)			7,456,207				(314,651	)
Asia-Pacific			522,000				(6,156	)			707,000				(38,839	)
Others			169,000				(904	)			179,000				(11,725	)
Total		$	14,589,676			$	(318,192	)		$	17,477,946			$	(846,224	)
By Counterparty:
North America		$	6,791,356			$	(157,988	)		$	8,872,732			$	(439,704	)
Europe			7,681,320				(158,642	)			8,463,214				(401,245	)
Asia-Pacific			117,000				(1,562	)			132,000				(5,203	)
Others			—				—				10,000				(72	)
Total		$	14,589,676			$	(318,192	)		$	17,477,946			$	(846,224	)
Credit Swaps Sold -Tranche
By Counterparty:
North America		$	600,000			$	(67,526	)		$	600,000			$	(143,205	)
Europe			4,400,000				(612,542	)			4,400,000				(1,133,312	)
Total		$	5,000,000			$	(680,068	)		$	5,000,000			$	(1,276,517	)
CDS on ABS
By Reference Entity:
North America		$	38,682			$	(32,122	)		$	67,654			$	(53,419	)
Total		$	38,682			$	(32,122	)		$	67,654			$	(53,419	)
By Counterparty:
North America		$	28,682			$	(24,175	)		$	38,494			$	(27,695	)
Europe			10,000				(7,947	)			29,160				(25,724	)
Total		$	38,682			$	(32,122	)		$	67,654			$	(53,419	)
Credit Swaps Purchased-Single Name
By Reference Entity:
North America		$	(11,740	)		$	3,886			$	(11,740	)		$	2,699
Total		$	(11,740	)		$	3,886			$	(11,740	)		$	2,699
By Counterparty:
Europe		$	(11,740	)		$	3,886			$	(11,740	)		$	2,699
Total		$	(11,740	)		$	3,886			$	(11,740	)		$	2,699