The following is a discussion and analysis of our financial condition and results of operations. This discussion should be read in conjunction with the condensed consolidated financial statements, including the notes thereto, included elsewhere in this Quarterly Report and our consolidated financial statements and accompanying notes which appear in the Company's 2008 Annual Report on Form 10-K. It contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and in the Company's 2008 Annual Report on Form 10-K, particularly under Item 1A "Risk Factors" and the heading "Cautionary Note Regarding Forward-Looking Statements." Capitalized terms used but not defined in this discussion are as defined elsewhere in this Quarterly Report. Business
Primus Guaranty, Ltd. is a holding company that conducts business currently through two principal operating subsidiaries, Primus Asset Management, an investment manager to third party entities and affiliated companies and Primus Financial, a CDPC, and a provider of credit protection. Primus Asset Management
Primus Asset Management 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 ("CypressTree") and its subsidiaries. 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. With the CypressTree acquisition, Primus Asset Management currently manages eight CLOs. CLOs issue securities backed by a diversified pool of primarily below investment grade rated senior secured loans of corporations. Additionally, Primus Asset Management currently manages five 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 Reference Entities. Primus Asset Management receives fees for its investment management services to the five 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
Primus Financial 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 agreed, upon the occurrence of a default or other defined credit event (e.g., bankruptcy, failure to pay or restructuring) affecting a designated issuer, referred to as a Reference Entity, to pay 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 related to 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 (S&P/Moody's) or below of the reference obligation.
At September 30, 2009, Primus Financial's credit swap portfolio had a total notional amount of $19.6 billion, which included $14.6 billion of single name credit swaps, $5.0 billion of tranches and $38.7 million of CDS on ABS. See note 4 of notes to condensed consolidated financial statements for further information.
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. PRS Trading was dissolved in May 2008. During the fourth quarter of 2007, the Company discontinued 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. Harrier was dissolved in February 2009.
Trends and Business Outlook
The global financial and credit markets showed significant improvement during the third quarter of 2009. Global capital markets reopened and activity levels were at a record pace for new investment grade and high yield corporate bond issuances. The flow of investor cash into fixed income mutual funds was also very high. There was a significant rally in credit spreads across the investment grade and non-investment grade sectors. Global equity markets also showed strong performance in the quarter. Notwithstanding these overall positive developments, there is an expectation that the credit markets likely will continue to remain challenging with the prospect of additional corporate defaults particularly from those companies without ready access to the capital markets. These conditions could exist in 2010. Should these difficult conditions persist during the fourth quarter of 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 have significantly tightened criteria for acceptable counterparties. In almost every case, these dealer and bank counterparties are continuing to require that counterparties 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.

Our management team, in consultation with our board, has carefully reviewed our strengths, weaknesses, opportunities and challenges and during the quarter of 2009 put in place a three-year strategy that focuses on providing value to shareholders.
Our strategy includes the following business priorities and initiatives:
• Amortizing Primus Financial's credit swap portfolio;

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

• Efficiently allocating capital; 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 nine months of 2009, with approximately $1.9 billion notional amount of credit swap contracts maturing in the first nine months of 2009; an additional $793.5 million maturing during the remainder of 2009 (unless terminated early). The average remaining maturity of Primus Financial's credit swap portfolio was 2.51 years at September 30, 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. There is a wide range of possible outcomes and therefore value to shareholders from the amortization of Primus Financial's credit swap portfolio. The most important element in determining value will be the credit losses Primus Financial may incur over the credit swap portfolio's remaining life. Management has engaged Primus Financial's counterparties in discussions of various steps that could be taken to reduce the range of possible negative outcomes for shareholders from this portfolio and these discussions are ongoing. The overall purpose of a credit mitigation transaction is to reduce the net risk of Primus Financial's credit swap portfolio, thereby increasing the likelihood of significant amount of capital that may be preserved by Primus Financial at the final maturity of the credit swap portfolio. Primus Financial entered into two credit mitigation transactions during the third quarter of 2009, as discussed below.
During July 2009, Primus Financial Products, LLC entered into a transaction with a significant bank counterparty with respect to credit default swaps having a total notional principal of $1.3 billion. Under the terms of the transaction, Primus Financial Products, LLC and the bank terminated credit default swaps with an aggregate notional principal of $40 million. These credit default swaps were written primarily on a financial guaranty insurance ("monoline") Reference Entity. Primus Financial Products, LLC has paid a termination fee of $15 million to the counterparty to terminate these swaps. In addition, Primus Financial Products, LLC assigned the remaining credit default swaps that it had sold to the counterparty to a newly formed, wholly owned subsidiary. Primus Financial Products, LLC paid an assignment fee of approximately $36 million to its subsidiary. The subsidiary's potential liability under the credit default swap contracts with the counterparty is limited to this $36 million plus future premiums and earned interest. Cash and corporate notes of approximately $36.7 million have been pledged by the subsidiary in favor of a counterparty.

During September 2009, Primus Financial Products, LLC terminated $1.3 billion notional principal of credit swaps with a significant counterparty. These credit swaps represent the counterparty's entire portfolio of credit swaps with Primus Financial Products, LLC. Primus Financial Products, LLC paid $6.5 million to the counterparty, a significant discount to the carrying value of the portfolio at the time of the transaction, to terminate these credit swaps. Included in this portfolio were a small number of Reference Entities which Primus Financial concluded had a high risk profile, including certain financial guarantors. Our management believes that both these transactions have resulted in reducing our exposure to certain Reference Entities with higher risk profiles to reduce the overall risk of paying a counterparty claim.
The Company continues to discuss with its counterparties potential credit mitigation transactions, as it actively manages its credit protection portfolio in amortization. Primus Financial's previously announced strategy is to address certain concentration issues in a small number of higher risk sectors, including insurance, building/development and retail, among others. No assurance can be given that Primus Financial will be successful in completing risk mitigation transactions or, if successful, that Primus Financial will achieve the desired risk reductions in its credit swap portfolio.
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. As previously discussed, on July 9, 2009, Primus Asset Management completed the acquisition of CypressTree. Primus Asset Management has developed and is beginning to market various fund management alternatives which take advantage of its established credit platform and track record across US/Global investment grade and high-yield credit. Primus Asset Management plans to raise third-party capital for these funds to grow its assets under management.
Additionally, we are considering various alternatives for establishing a new credit protection business. During the third quarter of 2009, management had discussions with a number of potential counterparties and investors to discuss their level of interest in working with us in establishing this business. 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. Management believes that there have been no significant changes during the nine months ended September 30, 2009 to the items disclosed as our critical accounting policies in Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2008 Annual Report on Form 10-K. See note 2 and 5 of notes to the condensed consolidated financial statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q for information regarding new Accounting Pronouncements and Financial Instruments and Fair Value Disclosures, respectively.

Counterparty Default - LBSF
Primus Financial had 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 has been obligated to pay approximately $9.5 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 $1.9 million and $5.5 million on the credit swaps with LBSF during the three and nine months ended September 30, 2009, respectively. The cumulative amount of $9.5 million due, but unpaid, was netted against the unrealized losses on the credit swaps with LBSF outstanding at September 30, 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 with LBSF 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 transactions. 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 September 30, 2009 Compared With Three Months Ended September 30, 2008
Overview of Financial Results
GAAP net income available to common shares for the third quarter of 2009 was $461.5 million, primarily attributable to mark-to-market unrealized gains of $471.5 million on Primus Financial's credit swap portfolio during the third quarter of 2009. GAAP net (loss) available to common shares for the third quarter of 2008 was $(390.2) million, primarily attributable to mark-to-market unrealized losses of $(327.6) million on Primus Financial's credit swap portfolio during the third quarter of 2008.

Net credit swap premiums earned were $21.9 million in the third quarter of 2009, compared with $24.4 million in the third quarter of 2008. The decrease in net premiums primarily is 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 $1.2 million in the third quarter of 2009, compared with $6.2 million in the third quarter of 2008. The decrease primarily is attributable to lower market interest rates and lower invested balances.
During the three months ended September 30, 2009, we recorded a net gain of $0.6 million on the retirement of long-term debt from purchases of our 7% Senior Notes.
Primus Financial's perpetual preferred securities and subordinated deferrable interest notes have been issued in the auction rate market. The turmoil in the auction rate markets that began in August 2007 has continued thus far 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 increased to, and during 2009 have remained at, the maximum rates specified in the respective security agreements.
Interest expense and distributions on preferred securities issued by Primus Financial were $2.8 million in the third quarter of 2009, compared with $5.4 million in the third quarter of 2008. The decrease primarily is 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 $11.2 million in the third quarter of 2009, compared with $4.3 million in the third quarter of 2008. The increase in operating expenses was principally a result of a higher accrual for incentive bonuses, and an increase in professional and legal fees. In the third quarter of 2008, compensation expense reflected a significant reduction in the accrual for incentive bonuses.
Net Credit Swap Revenue (Loss)
Net credit swap revenue (loss) was $471.8 million and $(387.7) million for the three months ended September 30, 2009 and 2008, respectively. Net credit swap revenue (loss) includes:
• Net premiums earned;

• Net realized gains (losses) on credit swaps, which include gain (losses) on terminated credit swaps sold and losses on credit events during the period; and

• Net unrealized gains (losses) on credit swaps.

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

                                                          Three Months Ended
                                                            September 30,
                                                         2009           2008
       Net premiums earned                             $  21,885     $   24,378
       Net realized gains (losses) on credit swaps       (21,500 )      (84,415 )
       Net unrealized gains (losses) on credit swaps     471,450       (327,646 )

       Total net credit swap revenue (loss)            $ 471,835     $ (387,683 )

Net Premiums Earned - Primus Financial
Net premiums earned were $21.9 million and $24.4 million for the three months ended September 30, 2009 and 2008, respectively. Net premiums earned include:
• Premium income on single name credit swaps sold;

• Premium income on tranches sold;

• Premium income on CDS on ABS; and

• Net premium income (expense) on credit swaps undertaken to offset credit risk.

The following table shows the components of net premiums earned for the three months ended September 30, 2009 and 2008 (in thousands):

                                                                Three Months Ended
                                                                   September 30,
                                                                2009           2008
Premium income on single name credit swaps sold              $   16,613      $  18,959
Premium income on tranches sold                                   5,200          5,202
Premium income on CDS on ABS                                         85            262
Net premium income (expense) on credit swaps undertaken
to offset credit risk                                               (13 )          (45 )

Total net premiums earned                                    $   21,885      $  24,378

Premium income on single name credit swaps sold was $16.6 million and $19.0 million (excludes premiums on credit swaps with LBSF, since the date of LBSF's initial default) during the three months ended September 30, 2009 and 2008, respectively. The decrease primarily was attributable to the amortization of Primus Financial's credit swap portfolio.
Premium income from tranches sold was $5.2 million and $5.2 million for the three months ended September 30, 2009 and 2008, respectively.
Premium income on CDS on ABS was $85 thousand and $262 thousand during the three months ended September 30, 2009 and 2008, respectively.

Net Realized Gains (Losses) on Credit Swaps - Primus Financial Net realized gains (losses) for the three months ended September 30, 2009 and 2008 are summarized in the following table (in thousands):

                                                                Three Months Ended
                                                                   September 30,
                                                                2009          2008
Realized gains on single name credit swaps                    $       -     $       4
Realized gains (losses) on single name credit swaps                   -       (84,419 )
Realized losses on terminated single name credit swaps sold     (21,500 )           -

Total net realized losses on credit swaps                     $ (21,500 )   $ (84,415 )

Net realized losses on credit swaps sold were $21.5 million and $84.4 million for the three months ended September 30, 2009 and 2008, respectively. Realized losses for the three months ended September 30, 2009 resulted from payments to two counterparties for the credit mitigation transactions as previously discussed. The realized losses incurred during the three months ended September 30, 2008 were primarily the result of the credit events that occurred on four single name Reference Entities in that period. Net Unrealized Gains (Losses) on Credit Swaps - Primus Financial The unrealized gains (losses) on credit swaps sold for the three months ended September 30, 2009 and 2008 are summarized below (in thousands):

                                                                Three Months Ended
                                                                   September 30,
                                                               2009            2008
Net unrealized gains (losses) on credit swaps sold           $ 214,080      $ (103,202 )
Net unrealized gains (losses) on tranches sold                 261,924        (226,310 )
Net unrealized gains (losses) on CDS on ABS                     (3,759 )           625
Net unrealized gains (losses) on credit swaps undertaken
to offset credit risk                                             (795 )         1,241

Total net unrealized gains (losses) on credit swaps          $ 471,450      $ (327,646 )

Net unrealized gains (losses) on credit swaps were $471.5 million and $(327.6) million for the three months ended September 30, 2009 and 2008, respectively. The change in unrealized gains (losses) on credit swaps reflected the change in the fair value of Primus Financial's credit swap portfolio during these periods. During the three months ended September 30, 2009 and 2008, Primus Financial recorded nonperformance risk adjustments of $(212.0) million and $346.6 million, respectively, which is reflected in these periods. Asset Management and Advisory Fees
We earned $1.3 million and $1.1 million of asset management and advisory fees for the three months ended September 30, 2009 and 2008, respectively. The increase primarily was attributable to higher asset management fees as a result of the CypressTree acquisition, which amounted to $0.9 million from the date of acquisition. During 2009, asset management fees were reduced for the deferral of subordinated fees on certain CLOs during the three months ended September 30, 2009. The asset management fees have been deferred pending the cure of certain tests within the CLOs.

Primus Asset Management acts as collateral manager for CLOs, on behalf of third parties. Under the terms of the collateral management agreements, Primus Asset Management receives management fees quarterly for managing the selection, acquisition and disposition of the underlying collateral and for monitoring the underlying collateral, subject to the terms of the agreement. . . .