Primus Asset Management has entered into a Services Agreement with its affiliates, whereby it provides services to its affiliates, including management, consulting and information technology. PRS Trading / Harrier
PRS Trading Strategies, LLC ("PRS Trading") commenced operations in January 2006 to trade in a broad range of fixed income products, including credit default swaps, investment grade and high yield bonds, as well as leveraged loans. In April 2007, Primus Guaranty formed Harrier Credit Strategies Master Fund, LP ("Harrier"). During the second quarter of 2007, Primus Guaranty transferred the trading portfolio of its subsidiary, PRS Trading, to Harrier. Harrier traded in an expanded range of fixed income products, including credit swaps, total return swaps on loan transactions, CDS Indices, leveraged loans and investment grade and non-investment grade securities.
During the fourth quarter of 2007, the Company decided to discontinue Harrier, due in part to Harrier's performance and difficulty in raising third-party capital, given the market environment at that time. As of March 31, 2008, Harrier ceased trading activities and closed all of its remaining trading positions.
2009 Trends and Business Outlook
The global financial and credit markets remain challenging, although we did see some signs of improvement during the first quarter of 2009. These conditions have been characterized by illiquidity, wide credit spreads, a lack of price transparency across some asset classes and a flight to quality, among others. This environment is likely to continue until the global economic environment starts to improve and the financial crisis affecting global banks is abated. Should these difficult conditions persist during 2009 and afterwards, Primus Financial may experience a higher level of credit events which would have a material adverse impact on our financial condition and results of operations. Major credit swap dealers and global banks in reaction to the difficult credit environment and in response to their own capital issues, have significantly tightened criteria for acceptable counterparties. In almost every case, counterparties are now required to post collateral to transact in the credit swap market. Primus Financial does not have the capacity to post collateral to counterparties and generally has not been able to write any new credit protection since the second quarter of 2008.
Combined with a challenging business environment for Primus Financial, we also expect to see some changes in the credit swap market during 2009 as follows:
• Additional write-downs and sales of distressed credit assets;

• Further consolidation of major banks and credit swap dealers;

• Increased credit default swap market regulation; and

• One or more credit default swap clearinghouses.

Given the rapidly changing market environment, our management team, in consultation with our board, has carefully reviewed our strengths, weaknesses, opportunities and challenges in order to fashion a business plan, "2009 Business Outlook and Priorities" that focuses on providing value to shareholders. Our 2009 business priorities and initiatives includes the following:
• Amortizing Primus Financial's credit swap portfolio;

• Pursuing new opportunities in credit, structured credit and derivative markets; and

• Aligning costs with our business approach.

In amortization, Primus Financial will not pursue new opportunities to sell credit protection. As a result, Primus Financial's portfolio of credit swaps will amortize and existing credit swap contracts will expire at maturity (unless terminated early). The amortization of the portfolio continued during the first quarter of 2009, with approximately $635.2 million notional amount of credit swap contracts maturing in the first quarter of 2009; an additional $2.0 billion maturing during the remainder of 2009 (unless terminated early). The average remaining maturity of Primus Financial's credit swap portfolio was 2.86 years at March 31, 2009 compared with 3.03 years at December 31, 2008. Management's focus in amortizing Primus Financial's portfolio is to seek to maximize the potential value within Primus Financial.
We are continuing to pursue opportunities to grow our assets under management. Specifically, we see opportunities to acquire companies, asset management contracts and structured credit assets arising from the consolidation which is likely to take place during 2009 within the structured credit markets. Additionally, we are considering various alternatives for establishing a new credit protection business. If we are successful in establishing this new platform it will likely be a company that posts collateral. If appropriate, we may invest some of our capital in these new initiatives and may also seek capital from third-party investors.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates, and those differences may be material.
Critical accounting policies and estimates are defined as those that require management to make significant judgments and involve a higher degree of complexity. Our critical accounting policies and estimates are as follows:
Valuation of Financial Instruments
A significant number of our financial instruments are carried at fair value with changes in fair value recognized in earnings or loss each period. Effective January 1, 2008, we adopted the provisions of SFAS No. 157. Under this standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). In determining fair value, we use various valuation techniques. SFAS No. 157 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.

The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to valuation techniques using unobservable inputs (Level 3). Observable inputs are inputs that market participants would use in pricing the asset or liability that are based on market data obtained from sources independent of us. Unobservable inputs reflect our estimates of the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. These valuations techniques involve some level of management estimation and judgment. The degree to which management's estimation and judgment is required is generally dependent upon the market price transparency for the instruments, the availability of observable inputs, frequency of trading in the instruments and the instrument's complexity. In measuring the fair market values of our financial instruments, we maximize the use of observable inputs and minimize the use of unobservable inputs based on the fair value hierarchy established in SFAS No. 157. The hierarchy is categorized into three levels based on the reliability of inputs as follows:
• Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.

Cash and cash equivalents, which include deposits in banks and money market accounts, are categorized within Level 1. We do not adjust the quoted prices for such financial instruments.
• Level 2 - Valuations based on quoted prices in markets that are not considered to be active; or valuations for which all significant inputs are observable or can be corroborated by observable market data, either directly or indirectly.

U.S. government agency obligations, commercial paper, corporate debt securities and interest rate swap are categorized within Level 2 of the fair value hierarchy. The interest rate swap is included in other assets in the consolidated statements of financial condition.
• Level 3 - Valuations in which a significant input or inputs are unobservable and that are supported by little or no market activity.

Primus Financial's fair value of its credit swap portfolio is categorized within Level 3 of the fair value hierarchy, which includes single name credit swaps, tranches and CDS on ABS. The single name credit swap portfolio classification in Level 3 is primarily the result of the estimation of nonperformance risk, as discussed below. In addition, CLO investments and ABS are categorized within Level 3.

Nonperformance Risk Adjustment
As required under SFAS No. 157, we consider the effect of its nonperformance risk in determining the fair value of its liabilities. Upon adoption of SFAS No. 157 in the first quarter of 2008, we have incorporated a nonperformance risk adjustment in the computation of the fair value of Primus Financial's credit swap portfolio. The developing industry standard for calculating this adjustment is to incorporate changes in an entity's own credit spread into the computation of the mark-to-market liabilities. We derive an estimate of Primus Financial's credit spread because it does not have an actively quoted credit spread. This estimated credit spread was obtained by reference to similar other entities that have quoted spreads. The majority of the comparative entities are engaged in the financial insurance business. The consideration of nonperformance risk resulted in adjustments of approximately $1.2 billion and $1.3 billion as of March 31, 2009 and December 31, 2008, respectively, which reduced the fair value of the Company's credit swap liabilities in the condensed consolidated statements of financial condition. The change in nonperformance risk resulted in adjustments of $(82.4) million and $202.1 million during the three months ended March 31, 2009 and 2008, respectively, which increased (decreased) net credit swap revenue in the condensed consolidated statements of operations. Level 3 Assets and Liabilities
Level 3 assets, which include trading account assets and our two CLO investments, were $4.2 million, or 0.6% of total assets measured at fair value, at March 31, 2009. Level 3 liabilities, which include Primus Financial's credit swaps sold, were $2.1 billion, or 100% of total liabilities measured at fair value, at March 31, 2009. Primus Financial's credit swap valuation techniques are described below.
The following fair value hierarchy table presents information about our assets and liabilities measured at fair value on a recurring basis as of March 31, 2009 (in thousands):

                                         Quoted Prices
                                               in               Significant
                                         Active Markets            Other           Significant         Assets /
                                              for               Observable        Unobservable       Liabilities
                                        Identical Assets          Inputs             Inputs            at Fair
                                           (Level 1)             (Level 2)          (Level 3)           Value

Total assets                           $          519,461      $     234,295      $       4,195      $    757,951

Percentage of total assets measured
at fair value                                        68.5 %             30.9 %              0.6 %             100 %


Total liabilities                      $                -      $           -      $   2,050,571      $  2,050,571

Percentage of total liabilities
measured at fair value                                  -                  -                100 %             100 %

Valuation Techniques - Credit Swaps
Primus Financial's fair value of its portfolio of single name credit swaps, tranches and CDS on ABS, depends upon a number of factors, including:
• The contractual terms of the swap contract, which include the Reference Entity, the notional value, the maturity, the credit swap premium and the currency of the swap.

• Current market data, including credit swap premium levels pertinent to each Reference Entity, estimated recovery rates on Reference Entities, market interest rates, foreign exchange rates, an estimate of mid-market prices to exit prices, and for tranche transactions, estimates of the correlation of the underlying Reference Entities within each tranche transaction.

• Valuation models, which are used to derive a fair value of credit swaps. The valuation models have been internally developed but are benchmarked against market-standard models.

• Consideration of the credit risk of Primus Financial's counterparties, as well as its own nonperformance risk. SFAS No. 157 requires that nonperformance risk be considered when determining the fair value of Primus Financial's credit swaps.

• Fair value estimates of credit swaps from third-party valuation services and/or credit swap counterparties.

In general, the most significant component of the credit swap valuation is the difference between the contractual credit swap premium on the credit swaps Primus Financial has transacted and the comparable current market premium. The valuation process we use to obtain fair value is described below:
• For single name credit swaps, Primus Financial calculates a mid-market valuation for each credit swap in its portfolio using a credit swap valuation model. The inputs to the valuation model include: current credit swap premium quotes obtained from an independent pricing service on the Reference Entities, estimated recovery rates on Reference Entities, current interest rates and foreign exchange rates. The independent pricing service obtains mid-market credit swap premium quotes from a number of dealers in the credit swap market across a range of standard maturities and restructuring terms, and computes average credit swap premium quotes on specific Reference Entities. Primus Financial adjusts the independent mid-market credit swap premium quotes to derive estimated exit price valuations.

• For tranche credit swaps, Primus Financial calculates a mid-market valuation for each tranche transaction using a tranche valuation model. The inputs to the tranche valuation model include: current credit swap premium quotes obtained from an independent pricing service on the Reference Entities within the tranche, estimated recovery rates on the Reference Entities within the tranche, current interest rates market and correlation levels derived from credit swap indices. Primus Financial adjusts the mid-market valuations obtained from the model to estimated exit price valuations, using mid-market to exit price quotes obtained from tranche counterparties.

• For CDS on ABS, Primus Financial obtains expected cash flows on the underlying securities from an independent valuation service and quotes from Primus Financial's counterparties. Primus Financial uses the cash flow data as input to a CDS on ABS valuation model to obtain mid-market valuations. Primus Financial adjusts the mid-market valuations to obtain exit price valuations.

Valuation Techniques - Other Financial Instruments We use the following valuation techniques to determine the fair value of our other financial instruments:
• For cash and cash equivalents, which include deposits in banks and money market accounts, the fair value of these instruments is based upon quoted market prices. We do not adjust the quoted price for such instruments.

• For U.S. government agency obligations, commercial paper and corporate debt securities, the fair value is based upon observable quoted market prices and benchmarked to third-party quotes.

• For the interest rate swap, the fair value is based upon observable market data including contractual terms, market prices and interest rates and is benchmarked to a third-party quote.

• For the ABS, the fair value is based upon a valuation from an independent valuation service, which estimates the value of the bond by utilizing a valuation model. This model incorporates projected cash flows, utilizing default, prepayment, recovery and interest rate assumptions.

• For the two CLO investments, the fair value is based upon a valuation model which includes observable inputs, where available. The model calculates the present value of expected cash flows using estimates of key portfolio assumptions, including forecasted credit losses, prepayment rates, forward yield curves and discount rates commensurate with the risk involved. The valuations are benchmarked to third-party quotes.

Share-Based Employee Compensation Plans
We account for share-based compensation in accordance with SFAS No. 123(R), Share-Based Payment ("SFAS No. 123(R)"). SFAS No. 123(R) requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including share options and other forms of equity compensation based on estimated fair values. Compensation expense is recognized based on the fair value of share options, performance shares, restricted shares and share units, as determined on the date of grant and is being expensed over the related vesting period.
The fair value of the share options granted was determined using the Black-Scholes option-pricing model. The use of the Black-Scholes option-pricing model requires certain estimates for values of variables used in the model.

We also used a Monte Carlo simulation pricing model to estimate the fair value of performance shares with a share price market condition. The use of the Monte Carlo simulation pricing model requires certain estimates for values of variables used in the model.
Counterparty Default - Lehman Brothers Special Financing Inc. Primus Financial has entered into credit swap transactions with LBSF, pursuant to an ISDA Master Agreement. At the time of these transactions, LBSF was an indirect subsidiary of LBH, and LBH was the credit support provider under these transactions. During and subsequent to the end of the third quarter of 2008, LBSF suffered a number of events of default under the ISDA Master Agreement, including bankruptcy, failure to pay premiums when due and bankruptcy of its credit support provider. Primus Financial has not designated any early termination date under the ISDA Master Agreement, and accordingly, intends to continue the credit swap agreements. LBSF was obligated to pay approximately $5.9 million in premiums on its credit swap transactions since the third quarter of 2008, but has failed to do so. As a consequence, Primus Financial did not recognize premium income of approximately $1.8 million on the credit swaps with LBSF during the first quarter of 2009. The cumulative amount of $5.9 million due, but unpaid, was netted against the unrealized losses on the credit swaps with LBSF outstanding at March 31, 2009.
In our opinion, because the defaults of LBH and LBSF are not subject to cure, as a legal matter, Primus Financial is not obligated to settle with LBSF with respect to any existing or future credit events. However, under relevant accounting standards, Primus Financial will continue to carry outstanding credit swaps at their fair value.
Results of Operations
Introduction
The primary component of our financial results is net credit swap revenue
(loss). Net credit swap revenue (loss) incorporates credit swap premium income, together with realized gains and losses arising from the termination of credit swaps, as a result of credit events or credit mitigation decisions. In addition, changes in the unrealized gains (losses) fair value of credit swap portfolio are included in net credit swap revenue (loss). Other sources of revenue consist of interest income earned on our investments and fees earned from our asset management activities. Expenses include interest expense on the debt issued by Primus Guaranty and Primus Financial, employee compensation and other expenses. Primus Financial also makes distributions on its preferred securities. These components are discussed in more detail below.
Three Months Ended March 31, 2009 Compared With Three Months Ended March 31, 2008
Overview of Financial Results
GAAP net income available to common shares for the first quarter of 2009 was $106.8 million compared with a GAAP net loss available to common shares of $(670.1) million for the first quarter of 2008. Our GAAP net income
(loss) available to common shares primarily was driven by net credit swap revenue (loss) of $110.9 million and $(663.6) million, respectively. Net credit swap revenue (loss) primarily was attributable to mark-to-market unrealized gains on Primus Financial's credit swap portfolio during the first quarter of 2009 compared to significant mark-to-market unrealized losses during the first quarter of 2008.

Net credit swap premiums earned were $22.5 million in the first quarter of 2009, compared with $27.3 million in the first quarter of 2008. The decrease in net premiums is primarily attributable to the amortization of Primus Financial's credit swap portfolio. The components of our net credit swap revenue (loss) for Primus Financial are discussed in greater detail below.
Interest income on our portfolio of investments was $2.4 million in the first quarter of 2009, compared with $9.2 million in the first quarter of 2008. The decrease is primarily attributable to lower market interest rates and lower invested balances.
The turmoil in the auction rate markets that began in August 2007 continued during 2009. As a result, Primus Financial's perpetual preferred securities and subordinated deferrable interest notes were set at the contractually specified rates over London Interbank Offered Rate ("LIBOR"). These specified rates are subject to increase if the credit ratings on these securities are downgraded. During 2008, as a result of downgrades on these securities, the spread rates have increased to the maximum rates specified in the respective security agreements.
Interest expense and distributions on preferred securities issued by Primus Financial were $3.7 million in the first quarter of 2009, compared with $6.7 million in the first quarter of 2008. The decrease is primarily attributable to lower LIBOR, partially offset by the increase in the specified spread rates on Primus Financial's preferred securities and debt.
Operating expenses were $8.1 million in the first quarter of 2009, compared with $10.0 million in the first quarter of 2008. The decrease in operating expenses was principally a result of lower compensation and employee benefits and other . . .