Primus Guaranty, Ltd. Reports Fourth Quarter and Full Year 2010 Financial Results

HAMILTON, Bermuda--([ BUSINESS WIRE ])--Primus Guaranty, Ltd. (aPrimus Guarantya or athe Companya) (NYSE:PRS) today announced its financial results for the fourth quarter and full year ended December 31, 2010.

GAAP net income available to common shares for the fourth quarter 2010 was $128.3 million, or $3.30 per diluted share, compared with GAAP net income available to common shares of $295.0 million, or $7.21 per diluted share, for the fourth quarter 2009. GAAP net income from continuing operations for the fourth quarter 2010 primarily was attributable to net credit swap revenue of $142.4 million, which included unrealized gains in the fair value of Primus Financiala�s credit swap portfolio of $133.2 million. GAAP net income for the fourth quarter 2009 primarily was attributable to unrealized gains in the fair value of Primus Financiala�s credit swap portfolio of $336.8 million.
GAAP net income available to common shares for the full year 2010 was $255.5 million, or $6.33 per diluted share, compared with GAAP net income available to common shares of $1.5 billion, or $35.26 per diluted share, for the full year 2009. GAAP net income from continuing operations for the full year 2010 primarily was attributable to net credit swap revenue of $267.8 million, which included unrealized gains in the fair value of Primus Financiala�s credit swap portfolio of $296.5 million. GAAP net income for the full year 2009 primarily was attributable to unrealized gains in the fair value of Primus Financiala�s credit swap portfolio of $1.5 billion.
Economic Results for the fourth quarter 2010 were $(4.8) million, or $(0.12) per diluted share. Economic Results for the full year 2010 were $(40.8) million, or $(1.01) per diluted share. The primary difference between GAAP net income and Economic Results is that changes in the fair value of Primus Financiala�s credit swap portfolio are not included in Economic Results. Economic Results for the fourth quarter 2009 were $(35.5) million, or $(0.87) per diluted share, and for the full year 2009 were $(3.7) million, or $(0.09) per diluted share.
Economic Results book value per common share was $7.31 at December 31, 2010, compared with $8.48 at December 31, 2009. The decline in Economic Results book value per common share primarily was attributable to portfolio repositioning transactions and termination payments by Primus Financial in 2010.
The Company incurred $8.1 million of restructuring costs in 2010, predominantly in the fourth quarter. Included in restructuring costs were employee severance, occupancy and data service cancellation costs, which the Company incurred to reduce its ongoing expense base.
The loss from discontinued operations of $(50.4) million for the full year 2010 relates to the collateralized loan obligation (aCLOa) business which Primus divested in 2010. This loss includes standalone operating losses of the CLOs under management of $(61.2) million for the CLO business during 2010, which is attributable to non-parent interests and is not included in net income attributable to Primus common shareholders.
At December 31, 2010, the notional principal of Primus Financiala�s consolidated credit swap portfolio totaled $10.4 billion.

Earnings

A copy of this press release and the financial supplement, including additional credit swap portfolio and historical data, is available in the Investor Relations section of the Companya�s Web site at [ www.primusguaranty.com ]. Also available on the Web site is a letter dated February 24, 2011 to the shareholders from Richard Claiden, Chief Executive Officer.

Economic Results

In managing its business and assessing its profitability from a strategic and financial planning perspective, the Company believes it is appropriate to consider both its U.S. GAAP net income (loss) available to common shares as well as certain non-GAAP financial measures called aEconomic Resultsa. We define Economic Results as GAAP net income (loss) available to common shares, adjusted as follows:

Unrealized gains (losses) on credit swaps sold by Primus Financial are excluded from GAAP net income (loss) available to common shares;
Realized gains from early termination of credit swaps sold by Primus Financial are excluded from GAAP net income (loss) available to common shares;
Realized gains from early termination of credit swaps sold by Primus Financial are amortized over the period that would have been the remaining life of the credit swap. The amortized gain is included in Economic Results;
A provision for CDS on ABS credit events is included in Economic Results; and
A reduction in provision for CDS on ABS credit events upon termination of credit swaps is included in Economic Results.

The Company believes that quarterly fluctuations in the fair market value of Primus Financiala�s consolidated credit swap portfolio have little or no effect on the Company's business operations and that Economic Results provides a useful, alternative view of the Companya�s economic performance.

About Primus Guaranty

Primus Guaranty, Ltd. is a Bermuda company with offices in New York. Through its subsidiary, Primus Financial Products, LLC (aPrimus Financiala), the Company provides protection against the risk of default on primarily investment grade corporate and sovereign reference entities.

Forward-Looking Statements

Some of the statements included in this press release and other statements Primus Guaranty may make, particularly those anticipating future financial performance, business prospects, growth and operating strategies, market performance, valuations and similar matters, are forward-looking statements that involve a number of assumptions, risks and uncertainties, which change over time. Any such statements speak only as of the date they are made, and Primus Guaranty assumes no duty to, and does not undertake to, update any forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements, and future results could differ materially from historical performance. For a discussion of the factors that could affect the Company's actual results please refer to the risk factors identified from time to time in the Company's SEC reports, including, but not limited to, Primus Guaranty's Annual Report on Form 10-K, as filed with the U.S. Securities and Exchange Commission.


Primus Guaranty, Ltd. Consolidated Statements of Financial Condition (Unaudited) (in thousands except share amounts)

	December 31,			December 31,
	2010			2009

Assets
Cash and cash equivalents	$	177,736		$	299,514
Investments (includes $288,815 and $274,275 at fair value as of December 31, 2010 and 2009, respectively)		288,985			274,444
Restricted cash and investments		138,540			127,116
Accrued interest and premiums		5,860			6,163
Unrealized gain on credit swaps, at fair value		2,006			2,207
Goodwill and other intangible assets, net		-			8,017
Debt issuance costs, net		4,072			4,736
Other assets		17,660			10,550
Total assets	$	634,859		$	732,747

Liabilities and Equity (deficit)
Liabilities
Accounts payable and accrued expenses	$	9,776		$	7,855
Unrealized loss on credit swaps, at fair value		395,164			691,905
Payable for credit events		3,447			28,596
Long-term debt		215,828			244,051
Restructuring liabilities		3,729			-
Other liabilities		4,950			9,787
Total liabilities		632,894			982,194

Equity (deficit)
Common shares, $0.08 par value, 62,500,000 shares authorized, 38,078,790 and 38,267,546 shares issued and outstanding at December 31, 2010 and 2009, respectively		3,046			3,061
Additional paid-in capital		275,453			280,685
Accumulated other comprehensive income		3,333			2,148
Retained earnings (deficit)		(372,969	)		(628,443	)
Total shareholdersa� equity (deficit) of Primus Guaranty, Ltd		(91,137	)		(342,549	)
Preferred securities of subsidiary		93,102			93,102
Total equity (deficit)		1,965			(249,447	)
Total liabilities and equity (deficit)	$	634,859		$	732,747


Primus Guaranty, Ltd. Consolidated Statements of Operations (Unaudited) (in thousands except per share amounts)

	Three Months Ended December 31,					Years Ended December 31,
	2010		2009			2010	2009

Revenues
Net credit swap revenue	$	142,387	$	301,203	$	267,756	$	1,455,802
Interest income		3,226		2,030		13,140		6,685
Gain on retirement of long-term debt		1,681		3,560		9,866		43,151
Other income		1,560		333		4,205		3,797
Total revenues		148,854		307,126		294,967		1,509,435

Expenses
Compensation and employee benefits		5,487		3,548		18,650		17,661
Professional and legal fees		1,314		1,834		6,718		6,848
Interest expense		1,666		2,022		7,031		9,116
Restructuring costs		7,956		-		8,108		-
Other		1,574		2,546		6,774		8,507
Total expenses		17,997		9,950		47,281		42,132
Income from continuing operations before provision (benefit) for income taxes		130,857		297,176		247,686		1,467,303
Provision (benefit) for income taxes		(232)		33		(134)		184
Income from continuing operations, net of tax		131,089		297,143		247,820		1,467,119
Loss from discontinued operations, net of tax		(2,351)		(1,465)		(50,358)		(3,422)
Net income		128,738		295,678		197,462		1,463,697
Less:
Distributions on preferred securities of subsidiary		718		677		3,162		3,417
Net loss from discontinued operations attributable to non-parent interests in CLOs		(299)		-		(61,174)		-
Net income available to common shares	$	128,319	$	295,001	$	255,474	$	1,460,280

Income (loss) per common share:
Basic:
Income from continuing operations	$	3.45	$	7.55	$	6.38	$	36.46
Income (loss) from discontinued operations	$	(0.05)	$	(0.04)	$	0.28	$	(0.08)
Net income available to common shares	$	3.40	$	7.51	$	6.66	$	36.38
Diluted:
Income from continuing operations	$	3.35	$	7.25	$	6.06	$	35.34
Income (loss) from discontinued operations	$	(0.05)	$	(0.04)	$	0.27	$	(0.08)
Net income available to common shares	$	3.30	$	7.21	$	6.33	$	35.26

Weighted average common shares outstanding:
Basic		37,732		39,276		38,361		40,142
Diluted		38,905		40,908		40,366		41,414


Primus Guaranty, Ltd.
Regulation G and Other Disclosure
Economic Results
December 31, 2010
(Unaudited)

In managing its business and assessing its profitability from a strategic and financial planning perspective, the Company believes it is appropriate to consider both its U.S. GAAP net income (loss) available to common shares as well as certain non-GAAP financial measures called aEconomic Resultsa. We define Economic Results as GAAP net income (loss) available to common shares, adjusted as follows:

a Unrealized gains (losses) on credit swaps sold by Primus Financial are excluded from GAAP net income (loss) available to common shares;
a Realized gains from early termination of credit swaps sold by Primus Financial are excluded from GAAP net income (loss) available to common shares;
a Realized gains from early termination of credit swaps sold by Primus Financial are amortized over the period that would have been the remaining life of the credit swap. The amortized gain is included in Economic Results;
a A provision for CDS on ABS credit events is included in Economic Results; and
a A reduction in provision for CDS on ABS credit events upon termination of credit swaps is included in Economic Results.

The Company believes that quarterly fluctuations in the fair market value of Primus Financiala�s consolidated credit swap portfolio have little or no effect on the Company's business operations and that Economic Results provides a useful, alternative view of the Companya�s economic performance.

Economic Results per GAAP Diluted Share

(in 000's except per share amounts)	Three Months Ended December 31,						Year Ended December 31,
	2010			2009			2010			2009
GAAP Net income (loss) available to common shares	$	128,319		$	295,001		$	255,474		$	1,460,280
Adjustments:
Change in unrealized fair value of credit swaps sold (gain) loss by Primus Financial		(133,194	)		(336,799	)		(296,540	)		(1,483,763	)
Amortization of realized gains from the early termination of credit swaps sold by Primus Financial		107			314			810			1,414
Provision for CDS on ABS credit events		-			(966	)		(2,374	)		(16,208	)
Reduction in provision for CDS on ABS credit events upon termination of credit swaps		-			6,912			1,819			34,540
Economic Results	$	(4,768	)	$	(35,538	)	$	(40,811	)	$	(3,737	)
Economic Results earnings (loss) per GAAP diluted share	$	(0.12	)	$	(0.87	)	$	(1.01	)	$	(0.09	)
Economic Results weighted average common shares - GAAP diluted		38,905			40,908			40,366			41,414

Economic Results Book Value per Share

	December 31,			December 31,
	2010			2009

GAAP Shareholders' equity (deficit) of Primus Guaranty, Ltd.	$	(91,137	)	$	(342,549	)
Adjustments:
Accumulated other comprehensive (income) loss		(3,333	)		(2,148	)
Unrealized fair value of credit swaps sold (gain) loss by Primus Financial		393,158			689,698
Realized gains from early termination of credit swaps sold by Primus Financial		(33,574	)		(33,574	)
Amortized realized gains from the early termination of credit swaps sold by Primus Financial		33,443			32,633
Provision for CDS on ABS credit events		(68,791	)		(66,417	)
Reduction in provision for CDS on ABS credit events upon termination of credit swaps		48,575			46,756
Economic Results Shareholders' Equity	$	278,341		$	324,399
Economic Results book value per share issued and outstanding	$	7.31		$	8.48

GAAP book value per share issued and outstanding	$	(2.39	)	$	(8.95	)

Common shares issued and outstanding		38,079			38,268


Primus Guaranty, Ltd.
GAAP Net Credit Swap Revenue
December 31, 2010
(Unaudited)

GAAP Net Credit Swap Revenue

(in 000's)	Three Months Ended December 31,						Year Ended December 31,
	2010			2009			2010			2009
Net credit swap revenue components
Credit swaps sold - single name (Primus Financial)
Net premium income	$	8,798		$	13,994		$	43,784		$	64,824
Realized gains		-			-			-			25
Realized losses		-			(37,711	)		(40,002	)		(68,475	)
Change in unrealized gains/(losses)		28,072			127,482			108,053			658,245
Credit swaps sold - tranches (Primus Financial)
Net premium income		3,615			4,453			14,304			19,884
Realized gains		-			-			-			-
Realized losses		(6,683	)		(9,998	)		(41,683	)		(9,998	)
Change in unrealized gains/(losses)		108,542			204,385			180,892			800,833
Credit swaps undertaken to offset credit risk (Primus Financial)
Net premium income (expense)		(14	)		-			(101	)		11
Net realized gains (losses)		3,656			497			(299	)		(89	)
Change in unrealized gains/(losses)		(2,801	)		(430	)		1,669			(1,973	)
Credit swaps sold - ABS (Primus Financial)
Net premium income		56			81			268			397
Realized gains		-			-			-			-
Realized losses		-			(6,912	)		(4,597	)		(34,540	)
Change in unrealized gains/(losses)		(619	)		5,362			5,926			26,658
Net credit swap revenue (PARC fund)		(235	)		-			(458	)		-
Net credit swap revenue	$	142,387		$	301,203		$	267,756		$	1,455,802

Contributing Sources

Market Wire

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Primus Guaranty, Ltd. Reports Fourth Quarter and Full Year 2010 Financial Results