Primus Guaranty Reports Third Quarter 2006 Financial Results

Primus Guaranty, Ltd. ("Primus Guaranty”) (NYSE: PRS), a leading provider of credit protection, announced today GAAP net income of $23.7 million, or $0.54 per diluted share for its third quarter 2006, compared with a GAAP net income of $24.0 million, or $0.54 per diluted share for the third quarter of 2005. For the nine months ended September 30, 2006, GAAP net income was $69.5 million, or $1.56 per diluted share, compared with a GAAP net income of $975 thousand, or $0.02 per diluted share, for the nine months ended September 30, 2005. 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 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, and any realized gains from terminations of credit swaps sold prior to maturity, it amortizes those gains over the remaining original lives of the terminated contracts, except for credit swaps purchased as investments. 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. During the third quarter of 2006, Economic Results were $12.7 million, or $0.29 per diluted share, compared with $10.4 million, or $0.23 per diluted share, in the third quarter of 2005. For the nine months ended September 30, 2006, Economic Results were $36.8 million, or $0.83 per diluted share, compared with Economic Results of $24.2 million, or $0.54 per diluted share, for the nine months ended September 30, 2005. "I am quite pleased with the growth in our Economic Results and the third quarter economic ROE of 14%, given the challenging credit spread environment,” said Primus Guaranty Chief Executive Officer Thomas W. Jasper. "Good progress was made across all areas of our business with slower but opportunistic growth in the credit swap portfolio and the continued implementation of the asset management strategy.” Third Quarter Economic Revenues Economic revenues for the third quarter 2006 were $26.0 million, an increase of 41% from $18.5 million in the year-earlier quarter. Contributing to the growth in Economic Revenues was a 27% increase in premium income from Primus Financial’s* credit swaps sold, to $18.1 million in the third quarter of 2006, compared with $14.3 million in the same period of 2005. The increase reflects the continued growth of Primus Financial’s credit swap portfolio to $15.5 billion. Realized losses on the Primus Financial portfolio of credit swaps sold were $1.6 million in the third quarter of 2006, compared with $1.4 million for the same period of the prior year. These losses are attributable to our decision to reduce credit exposure through the early termination of certain credit swaps sold. To date, there have been no credit events in our portfolio of credit swaps sold. PRS Trading Strategies incurred a net trading loss of $72 thousand for the third quarter 2006. PRS Trading Strategies commenced trading in 2006, therefore there is no prior year comparison. The components of PRS Trading Strategies revenues were negative $461 thousand of net credit swap revenue, $313 thousand of net loan total return swap revenue and $76 thousand of net revenue from the loan warehouse. All three revenue components are incorporated in our Economic Results. Consolidated interest income for the third quarter of 2006 was $7.1 million, an increase of approximately $2.6 million from the third quarter of 2005. The increase was primarily due to higher investment yields and an increase in average invested balances. The average investment yield in the third quarter of 2006 increased to 4.40%, from 3.64% in the same quarter of 2005. Weighted average balances were $649 million for the third quarter of 2006, compared with $493 million in the same quarter of 2005. Third Quarter Operating and Financing Expenses Operating expenses, excluding financing costs, were $9.1 million for the third quarter of 2006, compared with $6.4 million in the third quarter of 2005. The third quarter operating expense includes a credit of approximately $500 thousand related to a reduction in stock compensation expense as a result of employee departures. The increase in operating expenses from the year-earlier quarter is primarily attributable to increased headcount, occupancy and recruitment expenses due to the expansion of our business operations. Financing costs, comprising distributions on preferred shares and interest expense, were $4.3 million in the third quarter of 2006, compared with $1.7 million in the year earlier quarter. The increase in financing costs was primarily attributable to higher interest rates and additional interest expense associated with the $125.0 million of notes issued by Primus Financial Products in December 2005. Nine Months ended September 30 Economic Revenues Economic revenues for the nine months ended September 30, 2006 were $75.1 million, an increase of 54% from $48.9 million in the year-earlier period. Contributing to the growth in Economic Revenues was a 32% increase in premium income from Primus Financial’s* credit swaps sold, to $51.1 million for the first nine months of 2006, compared with $38.7 million in the same period of 2005. The increase reflects the continued growth of Primus Financial’s credit swap portfolio. Realized losses on the Primus Financial portfolio of credit swaps sold were $2.5 million for the first nine months of 2006, compared with $4.5 million for the same period of the prior year. These losses are attributable to our decision to reduce credit exposure through the early termination of certain credit swaps sold. To date, there have been no credit events in our portfolio of credit swaps sold. PRS Trading Strategies incurred a net trading loss of $209 thousand for the nine months ended September 30, 2006. PRS Trading Strategies commenced trading in 2006, therefore there is no prior year comparison. The components of PRS Trading Strategies revenues were negative $722 thousand of net credit swap revenue, $437 thousand of net loan total return swap revenue and $76 thousand of net revenue from the loan warehouse. All three revenue components are incorporated in our Economic Results. Consolidated interest income for nine months ended September 30, 2006 was $20.5 million, an increase of approximately $9.5 million from the same period of 2005. The increase was primarily due to higher investment yields and an increase in average invested balances. The average investment yield in the first nine months of 2006 increased to 4.29%, from an average of 2.99% in the same period of 2005. Nine Months Ended September 30 Operating and Financing Expenses Operating expenses, excluding financing costs, were $26.2 million for nine months ended September 30, 2006, compared with $20.1 million for the same period of 2005. 2006 operating expenses include a credit of approximately $500 thousand related to a reduction in stock compensation expense, and 2005 operating expenses include an $800 thousand accelerated compensation expense, both related to employee departures. The increase in expenses from the prior year is primarily attributable to increased headcount, occupancy, recruitment and professional fee expense due the expansion of our business operations. Financing costs, comprising distributions on preferred shares and interest expense, were $12.1 million for the nine months ended September 30, 2006, compared with $4.4 million in the year earlier period. The increase in financing costs was primarily attributable to higher interest rates and additional interest expense associated with the $125.0 million of notes issued by Primus Financial Products in December 2005. Credit Swap Portfolio- Primus Financial* Single Name Credit Swap At September 30, 2006, Primus Financial’s portfolio of single name credit swaps sold totaled $15.2 billion, up 13% from $13.4 billion at December 31, 2005. There were 558 reference entities in the portfolio at September 30, 2006 compared with 532 at December 31, 2005. The third quarter 2006 new transaction volume for single name credit swaps sold was $525 million, with a weighted average premium of 35 basis points, and an average original tenor of 5.1 years. The weighted average original premium on the $15.2 billion portfolio of single name credit swaps sold as of September 30, 2006 was 44 basis points. Of the $525 million new transaction volume for single name credit swaps sold, $25 million was attributable to credit swaps against sub-investment grade reference entities (limited to the BB sector) at a weighted average premium of 132 basis points. Tranche Tranche notional sold was $350 million at September 30, 2006, with a weighted average premium of 105 basis points. Balance Sheet At September 30, 2006, total assets, on a GAAP basis, were $744.1 million, an increase of 11% from $673.1 million at December 31, 2005. At September 30, 2006, net shareholders' equity was $434.9 million, a 20% increase from $361.9 million at December 31, 2005. GAAP book value per basic share was $10.03 at September 30, 2006, relative to $8.38 at December 31, 2005. Economic book value per basic share was $8.57 at September 30, 2006, relative to $7.69 at December 31, 2005. Total cash, cash equivalents and investments at September 30, 2006 were $659.9 million, of which $606.8 million resides at Primus Financial. Net unrealized gains on Primus credit and other swaps purchased and sold was $58.6 million at September 30, 2006, up from $21.8 million at December 31, 2005. The change was primarily due to declines in market credit swap premium levels, which resulted in a net increase in the value of the consolidated portfolio. Earnings Conference Call Primus Guaranty will host a conference call Tuesday, November 7, 2006, at 11:00 AM (ET) with access available via Internet and telephone. To access the live conference call, dial (866) 831-6267 (toll-free domestic) or (617) 213-8857 (international). The access code is 67194643. Please call to register at least 10 minutes before the conference call begins. A replay of the call will be available for three weeks via telephone starting at approximately 1:00 PM (ET) on Tuesday, November 7, 2006, and can be accessed at (888) 286-8010 (toll-free domestic) or (617) 801-6888 (international). The access code is 26602554. The webcast will be live as well as archived for one quarter on Primus Guaranty’s website: www.primusguaranty.com. To access the webcast, refer to the investor relations section of the website, and click on the webcast icon in the center of the page. 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 http://phx.corporate-ir.net/ phoenix.zhtml?c=179637&p=irol-presentations. (Due to the length of this URL, it may be necessary to copy and paste this hyperlink into your Internet browser's URL address field.) About Primus Guaranty Primus Guaranty, Ltd., through one of its operating subsidiaries, Primus Financial Products, LLC, offers protection against the risk of default on corporate and sovereign obligations. Primus Financial assumes these risks through the sale of credit swaps to dealers, banks and portfolio managers. As a swap counterparty, Primus Financial is rated Aaa by Moody's Investor Service, Inc. and AAA by Standard & Poor's Rating Services. Another principal operating subsidiary of Primus Guaranty, Primus Asset Management, Inc., provides credit portfolio management services to Primus Financial, as well as third parties. In addition, PRS Trading Strategies, LLC is an operating subsidiary of Primus Guaranty which engages in relative value trading and other strategies involving buying and selling of credit swaps and other financial instruments in pursuit of financial returns. The company is traded on the New York Stock Exchange under the symbol PRS. Primus Guaranty is a Bermuda company, with the operations of its principal subsidiaries, Primus Financial Products, Primus Asset Management and PRS Trading Strategies, headquartered in New York City. 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 10-K, as filed with the SEC. *NOTE: Primus Financial revenues and portfolio details exclude the three credit swap transactions with its affiliate (3rd quarter 2006 and 2005 premiums = $86 thousand and $86 thousand; notional = $87 million in both periods), Primus Re, as the effects of the results of operations are eliminated in the consolidation. Primus Guaranty, Ltd. Consolidated Statements of Financial Condition (in thousands except per share amounts)   September 30, December 31, 2006  2005  (unaudited) Assets Cash and cash equivalents $ 58,701  $ 69,355  Available-for-sale investments 599,932  560,147  Trading Investments 1,257  -  Accrued interest receivable 5,900  5,127  Accrued premiums and interest receivable on credit and other swaps 3,813  3,461  Premiums receivable on financial guarantees 100  300  Unrealized gain on credit and other swaps, at fair value 59,930  25,342  Deposit and warehouse loan agreement 4,116  -  Fixed assets and software costs, net 5,753  4,993  Debt issuance costs, net 3,032  3,147  Other assets   1,597    1,210  Total assets $ 744,131  $ 673,082    Liabilities and stockholders’ equity Accounts payable and accrued expenses $ 2,236  $ 3,035  Compensation payable 5,974  4,833  Interest payable 339  404  Accrued premiums on credit and other swaps 42  -  Taxes payable 19  54  Unrealized loss on credit and other swaps, at fair value 1,350  3,521  Deferred credit swap premiums 29  46  Deferred financial guarantee premiums 100  401  Deferred rent payable 586  416  Long-term debt 200,000  200,000  Total liabilities 210,675  212,710    Preferred securities of subsidiary 98,521  98,521    Stockholders’ equity: Common stock, $0.08 par value, 62,500,000 shares authorized, 43,341,973 and 43,176,511 shares issued and outstanding at September 30, 2006 and December 31, 2005 3,572  3,572  Additional paid-in-capital 268,365  265,848  Warrants 612  612  Accumulated other comprehensive loss (3,182) (4,254) Retained earnings 165,568  96,073  Total stockholders’ equity 434,935  361,851  Total liabilities, preferred securities of subsidiary and stockholders’ equity $ 744,131  $ 673,082  Primus Guaranty, Ltd. Consolidated Statements of Operations (in thousands except per share amounts)   Three Months Ended September 30, Nine Months Ended September 30, 2006  2005  2006  2005  (unaudited) (unaudited) Revenues Net credit swap revenue $ 28,905  $ 27,449  $ 85,865  $ 15,672  Net total return swap revenue 313  -  437  -  Net warehouse loan revenue 76  -  76  -  Premiums earned on financial guarantees 100  101  300  300  Asset management and advisory fees 542  49  709  140  Interest income 7,143  4,483  20,530  10,969  Investment portfolio realized gains (losses) -  (3) -  20  Foreign currency revaluation gain (loss)   (32)   55    (56)   (1,464) Total net revenues   37,047    32,134    107,861    25,637    Expenses Compensation and employee benefits 5,023  3,537  15,517  12,139  Professional and legal fees 1,361  981  3,645  2,731  Depreciation and amortization 649  533  1,846  1,574  Technology and data 726  535  1,546  1,250  Interest expense 2,831  649  7,933  1,640  Other   1,302    805    3,632    2,423  Total expenses 11,892  7,040  34,119  21,757  Distributions on preferred securities of subsidiary   (1,437)   (1,022)   (4,206)   (2,797) Income before provision for income taxes 23,718  24,072  69,536  1,083  (Provision) benefit for income taxes   14    (63)   (41)   (108) Net income available to common shares $ 23,732  $ 24,009  $ 69,495  $ 975    Income per common share: Basic $ 0.55  $ 0.56  $ 1.61  $ 0.02  Diluted $ 0.54  $ 0.54  $ 1.56  $ 0.02  Average common shares outstanding: Basic 43,314  43,120  43,285  43,147  Diluted 44,341  44,543  44,410  44,673  Primus Guaranty, Ltd. Regulation G Disclosure Economic Results September 30, 2006 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 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, and 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. 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.   Economic Earnings per Diluted Share   (in 000's except per share amounts) Three Months Ended September 30,   Nine Months Ended September 30, 2006  2005  2006  2005  GAAP net income $ 23,732  $ 24,009  $ 69,495  $ 975  Adjustments:   Less: Change in unrealized fair value of credit swaps sold (gain)losses (12,776) (15,190) (37,366) 19,008    Less: Realized gains from early termination of credit swaps sold (12) (201) (625) (790)   Add: Amortization of realized gains from the early termination of credit swaps sold 1,777  1,738  5,274  5,027                    Net Economic Results   $ 12,721    $ 10,356    $ 36,778    $ 24,220    Economic earnings per diluted share $0.29  $0.23  $0.83  $0.54    Economic weighted average common shares outstanding-diluted 44,341  44,543  44,410  44,673                          Economic Book Value per Share   September 30, December 31, 2006  2005    GAAP Shareholders' Equity $ 434,935  $ 361,851  Adjustments:   Add: Accumulated other comprehensive (income) / loss 3,182  4,254    Less: Unrealized fair value of credit swaps sold (gain)/loss (59,187) (21,821)   Less: Realized gains from early termination of credit swaps sold (28,706) (28,081)   Add: Amortized realized gains from the early termination of credit swaps sold 21,178  15,904            Economic Shareholders' Equity   $ 371,402    $ 332,107    Economic book value per share-basic $8.57  $7.69    GAAP book value per share-basic $10.03  $8.38    Common shares outstanding-basic 43,342  43,176