Primus Guaranty Reports Fourth Quarter 2007 Financial Results

Primus Guaranty, Ltd. ("Primus Guaranty” or "the company”) (NYSE: PRS), a leading provider of credit protection, announced today a GAAP net loss of $403.9 million, or $8.97 per diluted share for the fourth quarter of 2007, compared with GAAP net income of $25.4 million, or $0.57 per diluted share for the fourth quarter of 2006. The fourth quarter 2007 included non-recurring restructuring cost of $3.0 million, or $0.07 per diluted share, in connection with the discontinuation of Harrier Credit Strategies Master Fund LP ("Harrier”). For the year ended December 31, 2007, the GAAP net loss was $563.5 million, or $12.58 per diluted share, compared with GAAP net income of $94.9 million, or $2.13 per diluted share, for the year ended December 31, 2006. The GAAP net loss in the fourth quarter 2007 was primarily a reflection of changes in the unrealized market value of the company’s credit protection portfolio resulting from widening credit spreads. The company’s credit protection business employs a buy and hold approach. Quarterly fluctuations in the market value of the portfolio of credit swaps do not impact how the company manages this business nor do they have any direct impact on Primus Financial Products’ ("Primus Financial”) AAA/Aaa ratings. In addition, quarterly fluctuations in the value of a credit default swap contract will net out to zero if the contract is held to maturity and no credit event occurs. Economic Results In managing its business and assessing its growth and profitability from a strategic and financial planning perspective, the company believes it is appropriate to consider both its U.S. GAAP financial results as well as the impact on those results of fair value accounting and the early termination of credit swaps. Therefore, the company evaluates what its Economic Results would have been if it excluded from revenue the amounts of any unrealized gains and losses on Primus Financial’s portfolio of credit swaps sold, any realized gains from terminations of credit swaps sold prior to maturity, although it amortizes those gains over the remaining original lives of the terminated contracts, except for credit swaps purchased as investments. During the fourth quarter 2007, the company included a provision of $40.9 million to account for the credit events that occurred subsequent to the year end with respect to the portfolio of credit swaps on asset backed securities. The company believes that by excluding quarterly fluctuations in the fair market value of the long-term portfolio of swaps sold, which variations have little or no effect on the company's operations, Economic Results provide a useful, and more meaningful, alternative view of long-term trends in profitability. Applying these adjustments to GAAP revenues will derive "Economic Results revenues”. During the fourth quarter of 2007, Economic Results were negative $28.0 million, or negative $0.62 per diluted share, compared with $14.5 million, or $0.33 per diluted share, in the fourth quarter of 2006. The fourth quarter 2007 included a provision of $40.9 million related to credit events in the portfolio of credit swaps sold on asset backed securities and a $3.0 million non-recurring restructuring cost associated with the closure of Harrier. On January 30, 2008, Standard and Poor’s Rating Services ("S&P”) announced a change in their ratings methodology and assumptions relating to CDOs and other structured products, including certain asset backed securities. As a result of these changes, the S&P ratings on six residential mortgage backed securities referenced by credit default swaps written by Primus Financial were downgraded to CCC or below. The notional principal on these credit swaps was $45.0 million. Under the terms of the ISDA master agreements governing credit swaps on asset backed securities, a downgrade of the underlying securities to CCC or below is considered a credit event. Accordingly, the counterparties to the credit swap have the right to present the underlying residential mortgage backed security to Primus Financial in exchange for the cash notional value of the credit swap. The $40.9 million provision reflects the net difference between the $45.0 million notional principal on the credit swap contracts affected by these actions and the estimated current market value of the securities. To date, no counterparty has presented to us any of the referenced securities under the six credit swaps. In accordance with the ISDA agreement, until the referenced asset backed securities are presented to the company, the respective credit swaps remain outstanding and premiums are required to be paid by the counterparties. The remaining balance of our credit swap portfolio on residential mortgage backed securities has a notional value of $35.0 million. Harrier incurred a net trading loss of $1.1 million in the fourth quarter 2007. For the year ended December 31, 2007, Economic Results were $12.7 million, or $0.28 per diluted share, compared with Economic Results of $51.3 million, or $1.15 per diluted share, for the year ended December 31, 2006. Commenting on the company’s performance, Primus Guaranty, Ltd. Chief Executive Officer Thomas Jasper noted, "2007 was a mix of opportunities and challenges for the company. Certainly, the highlight of the year was the record growth we achieved in our credit protection business at very attractive returns. Our biggest challenge was the virtual shut down in the structured credit markets, which dramatically slowed the growth of our asset management business and caused us to discontinue our credit strategy fund, Harrier. "Clearly, Standard & Poor’s decision last week to change their expected loss rates on 2006 vintage residential mortgage backed securities causing credit events in our CDS of ABS portfolio was very disappointing news. I can assure you that our capital position remains strong and I do not believe this event will have any impact on our AAA/Aaa ratings. "I am extremely pleased with the record growth we achieved in our credit protection business during the fourth quarter and that we also showed strong growth in January 2008. As I look forward, our top priorities are continuing to grow our credit protection business and growing assets under management in our asset management business.” Fourth Quarter Revenues Economic Results revenues for the fourth quarter 2007 were $33.6 million, an increase of 15.5% from $29.1 million in the year earlier quarter. The fourth quarter 2007 Economic Results revenues excludes the $40.9 million provision against credit events in the portfolio of credit swaps referenced against certain residential mortgage backed securities. Primus Financial’s premium income increased 29.5% to $23.7 million in the fourth quarter of 2007, compared with $18.3 million in the same period of 2006. The increase reflects the continued growth of Primus Financial’s credit swap portfolio to $23.0 billion at year end 2007. Net realized losses from the Primus Financial portfolio of credit swaps sold were $1.5 million in the fourth quarter of 2007, compared with $951 thousand for the same period of the prior year. The realized losses incurred during the three months ended December 31, 2007 and 2006 were primarily the result of our decision to reduce our exposure to a limited number of reference entities against which we had sold credit protection. The fourth quarter 2007 loss excludes the $40.9 million provision against credit events in the portfolio of credit swaps referenced against certain residential mortgage backed securities. During the quarter, the company decided to discontinue Harrier and unwound a significant portion of the portfolio. The company incurred a net trading loss of $1.1 million in the fourth quarter of 2007, compared to a $1.4 million net trading gain in the fourth quarter of 2006, representing a negative variance of $2.5 million. Asset management fees on our corporate investment grade synthetic CDOs and corporate loan related CLOs in the fourth quarter 2007 were $1.1 million, up from $554 thousand in the year earlier quarter. The increase was primarily due to fees related to our two CLOs, Primus CLO I, Ltd. and Primus CLO II, Ltd., which closed in December 2006 and July 2007, respectively. Consolidated interest income for the fourth quarter of 2007 was $10.7 million, an increase of $2.9 million from the fourth quarter of 2006. The increase was primarily driven by higher investment yields and an increase in average invested balances. The average investment yield in the fourth quarter of 2007 increased to 4.99% from 4.69% in the same quarter of 2006. Average investment balances were $855.5 million for the fourth quarter of 2007, compared with $667.0 million in the same quarter of 2006. The increase in invested balances was principally due to the proceeds of the $125.0 million senior notes offering by Primus Guaranty, Ltd. in December 2006. GAAP revenues for the fourth quarter 2007 were negative $383.2 million, a decrease of $423.2 million from the year earlier quarter. The decline in GAAP revenues was substantially a result of increased unrealized mark-to-market losses on the portfolio of credit swaps, which was due to a widening in credit spreads. During the fourth quarter 2007, credit spreads widened significantly as the global credit markets experienced difficult market conditions, which led to greater volatility and a re-pricing of credit risk. The unrealized mark-to-market loss in Primus Financial was $416.2 million in the fourth quarter of 2007, compared with a gain of $11.3 million in the year earlier quarter. Fourth quarter Operating, Financing and Restructuring Expenses Our operating expenses were $10.0 million, excluding financing and restructuring expenses, in the fourth quarter of 2007, compared with $10.2 million in the fourth quarter of 2006. The decrease was primarily due to reduced compensation expense and professional and legal fees, offset by an increase in technology and data costs. Financing costs, which include distributions on preferred shares and interest expense, were $7.7 million in the fourth quarter of 2007, compared with $4.4 million in the year earlier quarter. The increase was primarily attributable to higher rates on our debt and preferred securities, in particular our auction rate debt and preferred, together with higher debt balances associated with the $125.0 million senior notes offering by Primus Guaranty in December 2006. During the fourth quarter of 2007, our auction rate debt and preferred securities continued to reset at the maximum rates, resulting in higher interest expense. All of the company’s outstanding debt and preferred securities is long-term, with the first maturity date due in 2021. During the fourth quarter of 2007, the company decided to discontinue Harrier, a fund formed by the company in April 2007, due in part to Harrier’s trading losses and difficulty in raising third-party capital, given the current market environment. In the fourth quarter, restructuring costs of $3.0 million were charged in connection with Harrier’s discontinuation. Of the total restructuring costs, approximately $0.8 million relates to net employee termination benefits and approximately $2.2 million was in connection with the write-off of certain software and technology assets. Year Ended December 31, 2007 and 2006 Revenues Economic Results revenues for the year ended December 31, 2007 were $124.6 million, an increase of 19.5% from $104.3 million in the year earlier period. The full year 2007 Economic Results revenues excludes the $40.9 million provision we made against credit events in the portfolio of credit swaps referenced against certain residential mortgage backed securities. Premiums for the year ended December 31, 2007 increased to $84.6 million, compared with $69.4 million in the same period of 2006, representing a 21.9% increase. Net realized losses on the Primus Financial portfolio of credit swaps sold were $3.9 million for the year ended December 31, 2007, compared with $3.5 million for the same period of the prior year. The realized losses incurred were primarily the result of our decision to reduce our exposure to a limited number of reference entities against which we had sold credit protection. The full year 2007 net realized losses of $3.9 million excludes the $40.9 million provision we made against credit events in the portfolio of credit swaps referenced against certain residential mortgage backed securities. Net trading losses from Harrier were $7.4 million for year ended 2007, compared with a net realized gain of $1.2 million from the prior year. Asset management fees for the year ended December 31, 2007 were $3.5 million, an increase of $2.2 million from the same period in 2006. The increase was primarily due to fees related to our two CLOs, Primus CLO I, Ltd. and Primus CLO II, Ltd., which closed in December 2006 and July 2007, respectively. Consolidated interest income for the year ended December 31, 2007 was $41.8 million, an increase of $13.4 million from the year earlier period. The increase was primarily driven by higher investment yields and an increase in average invested balances. The average investment yield for the year ended 2007 increased to 5.05 % from 4.39% in the same period of 2006. Average balances were $828.0 million for the year ended 2007, compared with $647.0 million in the same period of 2006. GAAP revenues for the year ended December 31, 2007 were negative $492.5 million, a decrease of $640.4 million from the year earlier period. The decline in GAAP revenues was primarily a reflection of changes in the unrealized market value of the portfolio of credit swaps. As previously discussed, credit spreads widened significantly in the second half of 2007, as the global credit markets experienced difficult market conditions leading to greater volatility and considerable re-pricing of credit risk. Year ended December 31, 2007 and 2006 Operating and Financing Expenses Operating expenses, excluding financing and restructuring costs, were $39.6 million for the year ended December 31, 2007, compared with $36.4 million in the same period of 2006. The increase in operating expenses was mainly attributable to the expansion of our business activities. Financing costs, comprised of distributions on preferred shares and interest expense, were $28.3 million in the year ended December 31, 2007, compared with $16.5 million in the year earlier period. The increase was primarily attributable to higher short-term market interest rates on our long-term debt, together with higher debt balances associated with the $125.0 million senior notes offering by Primus Guaranty in December 2006. Credit Swap Portfolio - Primus Financial At December 31, 2007, Primus Financial’s combined portfolio of credit swaps totaled $23.0 billion compared with $15.8 billion at December 31, 2006. The combined portfolio had a weighted average original premium of 43.5 basis points, a weighted average rating of A+/A3, and an average remaining tenor of 3.7 years as of December 31, 2007. Single Name Credit Swaps At December 31, 2007, Primus Financial’s portfolio of single name credit swaps sold totaled $18.2 billion. The weighted average original premium on the $18.2 billion portfolio of single name credit swaps sold as of December 31, 2007 was 43.2 basis points. The portfolio had an average credit rating of A/Baa1, and represented 591 reference entities. In the fourth quarter 2007, new transaction volume for single name credit swaps sold was $2.2 billion, with a weighted average premium of 52.2 basis points, an average original tenor of 5.1 years, and an average credit rating of A/A3. All of the new transaction volume for single name credit swaps sold was credit swaps against investment grade reference entities. Tranches At December 31, 2007, Primus Financial’s tranches sold totaled $4.7 billion, with a weighted average premium of 43.1 basis points and an average rating of AA+/Aa1. The fourth quarter 2007 new transaction volume for tranches sold was $1.0 billion, with a premium of 21.4 basis points and an original tenor of 5.0 years. Credit Swaps on Asset Backed Securities At December 31, 2007, Primus Financial’s portfolio of credit swaps sold on asset backed securities totaled $80.0 million, with a weighted average premium of 140.8 basis points. We did not have new transaction volume for credit swaps on asset backed securities in the fourth quarter 2007. Balance Sheet At December 31, 2007, total assets, on a GAAP basis, were $887.7 million, a decrease of $14.8 million from December 31, 2006. At December 31, 2007, net shareholders' equity was negative $93.5 million, compared with $462.1 million at December 31, 2006. GAAP book value per basic share was negative $2.08 as of December 31, 2007, relative to $10.65 at December 31, 2006. Economic book value per basic share was $9.10 at December 31, 2007, relative to $8.92 at December 31, 2006. Total cash, cash equivalents and available-for-sale investments at December 31, 2007 were $860.3 million, of which $749.5 million was held at Primus Financial. This capital supports Primus Financial’s portfolio and it’s AAA/Aaa ratings. The $749.5 million of capital at Primus Financial includes $52.0 million that was transferred from Harrier and contributed into Primus Financial during the fourth quarter. Net unrealized losses on Primus credit and other swaps purchased and sold was $544.1 million at December 31, 2007, relative to a $70.4 million gain at December 31, 2006. The change in net unrealized losses was due to increases in market credit swap premium levels, which resulted in a net decrease in the value of the consolidated portfolio. Earnings Conference Call Primus Guaranty will host a conference call Tuesday, February 5, 2008 at 11 a.m. Eastern Standard Time to discuss its fourth quarter 2007 earnings, which are scheduled for release between 7 a.m. and 9 a.m. Eastern Standard Time Tuesday, February 5, 2008. A copy of the earnings press release and financial supplement will be available in the Investor Relations section of the company’s website, located at www.primusguaranty.com. The conference call will be available via live or archived webcast at http://ir.primusguaranty.com/ by dialing 866-761-0748 (domestic) and 617-614-2706 (international), Passcode 78802841. A replay of the call will be available from Tuesday, February 5, 2008 at 1 p.m. Eastern Standard Time until Tuesday, February 26, 2008 at 5 p.m. Eastern Standard Time. To listen to the replay, dial 888-286-8010 (domestic) or 617-801-6888 (international), Passcode 67181023. Supplemental financial information, including additional portfolio and historical data, will be available on Primus Guaranty, Ltd.'s website under "Investor Relations-Webcasts” or by clicking on www.primusguaranty.com. About Primus Guaranty Primus Guaranty, Ltd. is a Bermuda company, with its principal operating subsidiaries, Primus Financial Products, LLC, and Primus Asset Management, Inc., headquartered in New York City. Primus Financial Products offers protection against the risk of default on corporate, sovereign and asset backed security obligations through the sale of credit swaps to dealers and banks. As a swap counterparty, Primus Financial Products is rated Aaa by Moody's Investor Service, Inc. and AAA by Standard & Poor's Rating Services. Primus Asset Management provides credit portfolio management services to Primus Financial Products, and manages private investment vehicles, including two collateralized loan obligations and three synthetic collateralized debt obligations for third parties. Safe Harbor Statement Some of the statements included in this press release, particularly those anticipating future financial performance, business prospects, growth and operating strategies and similar matters, are forward-looking statements that involve a number of risks and uncertainties. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. For a discussion of the factors that could affect our actual results please refer to the risk factors identified from time to time in our SEC reports, including, but not limited to, our Annual Report on Form 10-K, as filed with the SEC. Primus Guaranty, Ltd. Consolidated Statements of Financial Condition (In thousands except per share amounts)     December 31,   December 31, 2007 2006 (unaudited) Assets Cash and cash equivalents $ 242,665 $ 204,428 Available-for-sale investments 617,631 584,911 Trading account assets - 14,537 Accrued interest receivable 7,684 6,374 Accrued premiums and receivables on credit and other swaps 4,187 4,022 Unrealized gain on credit and other swaps, at fair value 606 73,330 Fixed assets and software costs, net 5,036 5,510 Debt issuance costs, net 6,965 7,399 Other assets   2,968   1,957 Total assets $ 887,742 $ 902,468   Liabilities and shareholders’ equity Accounts payable and accrued expenses $ 2,182 $ 2,854 Accrued compensation 5,957 8,800 Interest payable 831 625 Unrealized loss on credit and other swaps, at fair value 544,731 2,931 Accrued premiums and payables on credit and other swaps 1,770 44 Trading account liabilities - 1,002 Long-term debt 324,096 325,000 Restructuring liabilities 1,709 - Other liabilities   1,407   600 Total liabilities 882,683 341,856   Preferred securities of subsidiary 98,521 98,521   Shareholders’ equity (deficit) Common shares, $0.08 par value, 62,500,000 shares authorized, 45,035,593 and 43,380,893 shares issued and outstanding at December 31, 2007 and 2006, respectively 3,603 3,470 Additional paid-in-capital 280,224 269,420 Warrants - 612 Accumulated other comprehensive loss (4,712) (2,375) Retained earnings (deficit)   (372,577)   190,964 Total shareholders’ equity (deficit)   (93,462)   462,091 Total liabilities, preferred securities of subsidiary and shareholders’ equity $ 887,742 $ 902,468 Primus Guaranty, Ltd. Consolidated Statements of Operations (In thousands except per share amounts)     Three Months Ended December 31,   Year Ended December 31, 2007   2006 2007   2006 (unaudited) (unaudited) Revenues Net credit swap revenue (loss) $ (394,070) $ 30,218 $ (535,064) $ 116,083 Premiums earned on financial guarantees - 100 - 400 Asset management and advisory fees 1,098 554 3,481 1,263 Interest income 10,673 7,844 41,847 28,374 Other trading revenue (loss) (769) 1,257 (2,689) 1,770 Foreign currency revaluation gain (loss)   (95)   30   (107)   (26) Total net revenues (losses)   (383,163)   40,003   (492,532)   147,864   Expenses Compensation and employee benefits 5,584 5,995 22,450 21,512 Professional and legal fees 1,154 1,502 4,948 5,147 Depreciation and amortization 414 671 1,748 2,517 Technology and data 1,379 881 4,620 2,427 Interest expense 5,693 2,916 20,729 10,849 Restructuring costs 3,022 - 3,022 - Other   1,458   1,164   5,872   4,796 Total expenses 18,704 13,129 63,389 47,248 Distributions on preferred securities of subsidiary   2,005   1,477   7,568   5,683 Income (loss) before provision for income taxes (403,872) 25,397 (563,489) 94,933 Provision for income taxes   -   1   52   42 Net income (loss) available to common shares $ (403,872) $ 25,396 $ (563,541) $ 94,891   Income (loss) per common share: Basic $ (8.97) $ 0.59 $ (12.58) $ 2.19 Diluted $ (8.97) $ 0.57 $ (12.58) $ 2.13 Average common shares outstanding: Basic 45,030 43,369 44,808 43,306 Diluted 45,030 44,475 44,808 44,472 Primus Guaranty, Ltd. Regulation G Disclosure Economic Results December 31, 2007   In managing its business and assessing its growth and profitability from a strategic and financial planning perspective, the company believes it is appropriate to consider both its U.S. GAAP financial results as well as the impact on those results of fair value accounting and the early termination of credit swaps. Therefore, the company evaluates what its Economic Results would have been if it excluded from revenue the amounts of any unrealized gains and losses on Primus Financial’s portfolio of credit swaps sold, any realized gains from terminations of credit swaps sold prior to maturity, although it amortizes those gains over the remaining original lives of the terminated contracts, except for credit swaps purchased as investments. During the fourth quarter 2007, the company included a provision of $40.9 million to account for the credit events that occurred subsequent to the year end with respect to the portfolio of credit swaps on asset backed securities. The company believes that by excluding quarterly fluctuations in the fair market value of the long-term portfolio of swaps sold, which variations have little or no effect on the company's operations, Economic Results provide a useful, and more meaningful, alternative view of long-term trends in profitability. Applying these adjustments to GAAP revenues will derive "Economic Results revenues”.   Economic Earnings per Diluted Share         (in 000's except per share amounts) Three Months Ended December 31,   Year Ended December 31, 2007 2006 2007 2006 GAAP net income (loss) $ (403,872 ) $ 25,396 $ (563,541 ) $ 94,891 Adjustments: Less: Change in unrealized fair value of credit swaps sold (gain)/losses 416,218 (11,335 ) 614,551 (48,701 ) Less: Realized gains from early termination of credit swaps sold (266 ) (1,377 ) (3,463 ) (2,002 ) Add: Amortization of realized gains from the early termination of credit swaps sold 812 1,824 6,044 7,098 Less: Provision for credit events (40,880 ) - (40,880 ) -                   Net Economic Results   $ (27,988 )   $ 14,508     $ 12,711     $ 51,286     Economic earnings (loss) per diluted share ($0.62 ) $ 0.33 $ 0.28 $ 1.15   Economic weighted average common shares outstanding-diluted 45,030 44,475 45,194 44,472                   Economic Book Value per Share   December 31, December 31, 2007 2006   GAAP Shareholders' Equity $ (93,462 ) $ 462,091 Adjustments:   Add: Accumulated other comprehensive loss 4,712 2,375   Less: Unrealized fair value of credit swaps sold (gain)/loss 544,029 (70,522 )   Less: Realized gains from early termination of credit swaps sold (33,546 ) (30,083 )   Add: Amortized realized gains from the early termination of credit swaps sold 29,046 23,002   Less: Provision for credit events (40,880 ) -           Economic Shareholders' Equity   $ 409,899     $ 386,863     Economic book value per share-basic $ 9.10 $ 8.92   GAAP book value per share-basic ($2.08 ) $ 10.65   Common shares outstanding-basic 45,036 43,381