Item 7A.    Quantitative and Qualitative Disclosures about Market Risk

Market risk represents the potential for losses that may result from changes in the value of a financial instrument as a consequence of market conditions. Our primary market risk is increasing or decreasing market credit swap premium levels, which increase or decrease the fair value of our credit swap portfolio. Market credit swap premium levels change as a result of specific events or news related to a Reference Entity, such as a change in a credit rating by any of the rating agencies. Additionally, market credit swap premium levels can vary as a result of changes in market sentiment. As a general matter, given our strategy of holding credit swaps sold until maturity, we do not seek to manage our overall exposure to market credit swap premium levels, and we expect fluctuations in the fair value of our credit swap portfolio as a result of these changes. In cases where we purchase credit swaps as short-term investments, we incur the cost of paying premiums until we terminate the purchased credit protection. We undertake these transactions in the expectation that the market credit swap premium level for the Reference Entity will rise subsequent to our purchase of protection, but any gains realized upon termination may not suffice to offset the premium expense we have incurred while holding the purchased credit protection. Indeed, the market credit swap premium level for the Reference Entity may fall and we may incur termination losses as well as premium expense as a result. The fair value of our credit swaps purchased will be affected by market credit swap premium levels, which will affect our net income. Currently, we purchase a limited amount of credit protection, relative to the size of our portfolio of credit swaps sold, and the cost of purchased credit protection does not materially impact our overall operating margin. The notional amount outstanding on credit swaps we purchased as short-term investments was $468.2 million at December 31, 2004.

We face other market risks, which are likely to have a lesser impact upon our net income than those associated with market credit swap premium level risk. These other risks include interest rate risk associated with market interest rate movements. These movements may affect the value of our credit swap portfolio as our pricing model includes an interest rate component, which is used to discount future expected cash flows. Interest rate movements may also affect the carrying value of our investments. The Primus Financial Cumulative Preferred Stock pays distributions that are based upon the auction rate preferred market. A difference between the rates we pay in the auction rate preferred market and the interest rates we receive on our investments may result in an additional cost to our company. Assuming that auction results with respect to the Primus Financial Cumulative Preferred Stock reflect prevailing short-term interest rates, each 25 basis point increase or decrease in the level of those rates would increase or decrease Primus Financial's annual distribution cost by approximately $125,000 for each of the Series A and Series B MMP Receipts, but would not affect distributions on the Series B MMP Receipts as the interest and auction rate for such MMP Receipts were set for a one year period on January 20, 2005. In addition, interest rate movements may increase or decrease the interest expense we incur on our $75 million of subordinated deferrable interest notes. A 25 basis point increase or decrease in the level of those rates would increase or decrease Primus Financial's interest expense by $188,000 annually, however at December 31, 2004, the interest rate on the subordinated deferrable interest notes was set for a one year period expiring in July of 2005. Conversely, since almost all of Primus Financial's $418.9 million cash balance is invested in short-term assets, in the event of such an increase in short-term interest rates, we would earn additional interest income. We also have some exposure to currency rates as we have sold Euro-denominated credit swaps. As of December 31, 2004, we have kept the premiums received from these transactions in Euro-denominated money market accounts. The value of the cash Euro balances is translated into United States dollars at current spot rates. Changes in the value of the Euro compared with the United States dollar may have an impact on our net income. We do not hedge any interest rate or currency market risks.

Counterparty risk represents the potential for loss should one or more of our counterparties be unable to meet its obligations due to bankruptcy or a similar event, which could adversely affect our results of operations. Our counterparties generally have investment grade credit ratings. At December 31, 2004, the notional and fair value amount of credit swaps outstanding with respect to our counterparties that had credit ratings of below investment grade were $5.0 million and $52 thousand, respectively. The premiums on these transactions were fully prepaid by the counterparties.

49

Item 8. Financial Statements and Supplementary Data

Primus Guaranty, Ltd.
Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm					51
Consolidated Statements of Financial Condition as of December 31, 2004 and 2003					52
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002					53
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2004, 2003 and 2002.					54
Consolidated Statements of Cash Flow for the years ended December 31, 2004, 2003 and 2002					55
Notes to Consolidated Financial Statements					56

All Financial Statement Schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or the Notes thereto.

50

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders' of
Primus Guaranty, Ltd.

We have audited the accompanying consolidated statements of financial condition of Primus Guaranty, Ltd. (the "Company") as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Primus Guaranty, Ltd. at December 31, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP
New York, NY

February 25, 2005

51

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Primus Guaranty, Ltd.
Consolidated Statements of Financial Condition
(dollars in 000s except per share amounts)

				December 31,
				2004				2003
Assets
Cash and cash equivalents				$	320,989			$	257,967
Short-term investments					161,101				3,968
Accrued interest receivable					1,381				129
Accrued premiums on credit swaps					3,349				3,642
Premiums receivable on credit swaps					197				140
Premiums receivable on financial guarantees					800				1,201
Asset management fee receivable					15				—
Prepaid expenses					868				395
Unrealized gain on credit swaps, at fair value					46,517				46,594
Fixed assets, less accumulated depreciation of $493 in 2004 and $259 in 2003					1,800				1,651
Internal use software costs, less accumulated amortization of $5,893 in 2004 and $4,176 in 2003					4,297				5,473
Income tax receivable					279				269
Debt issuance costs					1,125				—
Total assets				$	542,718			$	321,429
Liabilities and shareholders' equity
Accounts payable				$	904			$	653
Compensation payable					5,317				5,474
Brokerage fees payable					14				50
Current state and local taxes payable					12				—
Interest payable					364				—
Long-term debt					75,000				—
Unrealized loss on credit swaps, at fair value					259				68
Deferred rent payable					455				473
Deferred financial guarantee premiums					806				1,201
Unrealized loss on sublease					—				39
Deferred credit swap premiums					69				112
Total liabilities					83,200				8,070
Preferred securities of subsidiary					98,521				98,521
Commitments and contingencies (see Note 14)
Shareholders' equity:
Common stock, $0.08 par value, 62,500,000 shares authorized, 42,780,033 and 2,600,000 shares issued and outstanding at December 31, 2004 and 2003					3,535				230
Additional Paid-in-Capital					264,860				1,325
Convertible Preferred stock					—				143,908
Warrants					612				1,070
Retained earnings					91,990				68,305
Total shareholders' equity					360,997				214,838
Total liabilities, preferred securities of subsidiary and shareholders' equity				$	542,718			$	321,429

See accompanying notes.

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Primus Guaranty, Ltd.
Consolidated Statements of Operations
(amounts in 000s except per share amounts)

				Year Ended December 31,
				2004				2003				2002
Revenues
Net credit swap revenue				$	47,729			$	103,326			$	14,761
Premiums earned on financial guarantees					395				—				—
Interest income					4,850				2,617				1,610
Rental income					40				107				—
Asset management fees					15				—				—
Foreign currency revaluation					726				—				—
Other					—				—				12
Total net revenues					53,755				106,050				16,383
Expenses
Employee compensation and benefits					17,801				11,701				8,156
Excess-of-loss insurance policy premium					—				727				1,854
Professional and legal fees					2,414				3,369				4,002
Fixed asset depreciation and amortization					1,951				5,831				1,848
Technology and data feeds					1,363				1,336				1,108
Rent					744				702				525
Bank fees					576				532				174
Rating agency fees					346				494				544
Brokerage expense					602				442				363
Interest expense					881				—				—
Other					1,208				763				624
Total expenses					27,886				25,897				19,198
Distributions on preferred securities of subsidiary					(2,138	)			(1,854	)			—
Income (loss) before (provision) benefit for income taxes					23,731				78,299				(2,815	)
Benefit (provision) for income taxes					(46	)			172				(254	)
Net Income (loss) available to common shares				$	23,685			$	78,471			$	(3,069	)
Earnings (loss) per common share:
Basic				$	1.44			$	31.18			$	(1.22	)
Diluted				$	0.59			$	2.33			$	(1.22	)
Average common shares outstanding:
Basic					16,486				2,517				2,510
Diluted					40,256				33,737				2,510

See accompanying notes.

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Primus Guaranty, Ltd.
Consolidated Statements of Shareholders' Equity
(dollars in 000s)

				Year Ended December 31,
				2004				2003				2002
Common stock
Balance at beginning of year				$	230			$	208			$	240
Conversion of warrants to common stock					85				—				—
Shares issued to corporate sponsor					—				—				99
Shares repurchased and retired					—				(1	)			(146	)
Shares vested under employee compensation plans					91				23				15
Shares issued in Initial Public Offering					731				—				—
Conversion of Series A preferred stock					2,398				—				—
Balance at end of year					3,535				230				208
Additional paid-in-capital
Balance at beginning of year					1,325				211				—
Conversion of warrants to common stock					5,875				—				—
Shares repurchased and retired					—				(10	)			—
Shares vested under employee compensation plans					6,140				1,124				211
Shares issued in Initial Public Offering					110,010				—				—
Conversion of Series A preferred stock					141,510				—				—
Balance at end of year					264,860				1,325				211
Convertible Preferred stock
Balance at beginning of year					143,908				143,908				12
Series B retirement					—				—				(12	)
Proceeds from Series A issuance					—				—				143,908
Conversion of Series A to common stock					(143,908	)			—				—
Balance at end of year					—				143,908				143,908
Warrants
Balance at beginning of year					1,070				1,070				—
Conversion of warrants to common stock					(458	)			—				—
Proceeds from warrants issuance					—				—				1,070
Balance at end of year					612				1,070				1,070
Retained earnings (accumulated deficit)
Balance at beginning of year					68,305				(10,166	)			(7,097	)
Net income (loss)					23,685				78,471				(3,069	)
Balance at end of year					91,990				68,305				(10,166	)
Total shareholders' equity at end of year				$	360,997			$	214,838			$	135,231

See accompanying notes.

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Primus Guaranty, Ltd.
Consolidated Statements of Cash Flows
(dollars in 000s except per share amounts)

				Year Ended December 31,
				2004				2003				2002
Cash flows from operating activities
Net income (loss)				$	23,685			$	78,471			$	(3,069	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Non-cash items included in net income (loss):
Depreciation of fixed assets					234				214				45
Amortization of internal use software costs					1,717				5,617				1,803
Stock compensation					6,230				1,146				226
Net unrealized (gain) loss on credit swap portfolio					268				(46,739	)			213
Unrealized (gain) loss on sublease					(39	)			(22	)			62
Deferred rent					(18	)			163				310
Amortization of debt issuance costs					14				—				—
Distributions on preferred securities of subsidiary					2,138				1,854				—
Increase (decrease) in cash resulting from changes in:
Premiums receivable on credit swaps					(57	)			196				(336	)
Accrued premiums on credit swaps					293				728				(4,370	)
Deferred credit swap premiums					(43	)			112				—
Account receivable - sublease					—				9				(9	)
Deferred financial guarantee premiums					(395	)			1,201				—
Brokerage fees payable					(36	)			(14	)			64
Accrued interest receivable					(1,252	)			55				(185	)
Prepaid excess-of-loss insurance policy premium					—				618				1,854
Premiums receivable on financial guarantees					401				(1,201	)			—
Prepaid expenses					(473	)			(53	)			—
Asset management fee receivable					(15	)			—				—
Income tax receivable					(10	)			(269	)			—
Accounts payable					251				(60	)			(8,841	)
Compensation payable					(157	)			1,686				3,788
Interest payable					364				—				—
Current state and local taxes payable.					12				(254	)			254
Net cash provided by (used in) operating activities					33,112				43,458				(8,191	)
Cash flows from investing activities
Fixed asset purchases.					(383	)			(92	)			(1,818	)
Net purchase of short-term investments.					(157,133	)			(3,968	)			—
Development and purchase of internal use software					(541	)			(541	)			(12,351	)
Net cash used in investing activities					(158,057	)			(4,601	)			(14,169	)
Cash flows from financing activities
Proceeds from preferred security and warrants issuance					—				—				144,678
Proceeds from preferred security issuance of subsidiary					—				—				98,521
Proceeds from issuance of common shares					110,743				—				—
Repurchase and retirement of stock					—				(11	)			—
Proceeds from exercise of warrants					5,500				—				—
Proceeds from issuance of subordinated debt					75,000				—				—
Debt issuance costs					(1,139	)			—				—
Net preferred distributions of subsidiary					(2,138	)			(1,854	)			—
Net cash provided by (used in) financing activities					187,967				(1,865	)			243,199
Net increase in cash					63,022				36,992				220,839
Cash and cash equivalents at beginning of year					257,967				220,975				136
Cash and cash equivalents at end of year				$	320,989			$	257,967			$	220,975
Supplemental disclosures
Cash paid for interest				$	503			$	—			$	—
Cash paid for taxes					44				347				—

See accompanying notes.

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements
December 31, 2004

1.    Organization

Primus Guaranty, Ltd. ("Primus Guaranty" or the "Company"), is a Bermuda holding company, and the 100% owner of Primus Bermuda, Ltd. ("Primus Bermuda"), a Bermuda holding company. Primus Bermuda, originally Primus Barbados, Ltd., was re-domiciled in Bermuda in December 2004. Primus Bermuda is the 100% owner of Primus Group Holdings, LLC ("Primus Group Holdings"), a Delaware limited liability company. Primus Group Holdings has two principal operating subsidiaries, Primus Financial Products, LLC ("Primus Financial"), and Primus Asset Management, Inc. ("Primus Asset Management"). Primus Financial is a Delaware financial products limited liability company that maintains a long-term counterparty credit rating of AAA from Standard & Poor's ("S&P") and Aaa from Moody's Investors Service, Inc. ("Moody's" and, together with S&P, the "Rating Agencies"). The Company considers its legal domicile to be where it is incorporated, Bermuda. Primus Financial is primarily a provider of credit risk protection in the form of credit swaps covering single name, investment grade corporate and sovereign financial obligations. Primus Financial is also permitted to sell credit swaps referencing portfolios containing obligations of multiple reference entities. Primus Asset Management is a provider of administrative and technology support to Primus Financial and an asset manager for Primus Financial and third parties.

Primus Financial and Primus Asset Management function as separate entities from Primus Group Holdings. Additionally, the obligations of Primus Guaranty are not the obligations of Primus Bermuda, Primus Group Holdings, or any other of its affiliates, and vice versa. Primus Asset Management wholly owns Primus Re, Ltd. ("Primus Re"), a Bermuda company that operates as a financial guaranty insurance company and is licensed as a Class 3 Insurer under the Insurance Act of 1978 of Bermuda.

Prior to March 14, 2002, Primus Guaranty and its subsidiaries were in the development stage. On March 14, 2002, the Company raised $144.9 million in proceeds (net of issuance expenses) through the sale of Series A Preferred Stock, of which $122.5 million was contributed to Primus Corporate Services, Inc. ("Primus Corporate"), at that time the parent company of Primus Financial and Primus Re and now known as Primus Group Holdings. Primus Corporate contributed $109 million to Primus Financial as common stock. Primus Financial began selling credit swaps on June 7, 2002. On May 22, 2002, Primus Asset Management was created as part of a reorganization of the Primus Guaranty corporate structure. At that time, Primus Corporate transferred its assets and liabilities (except for its investment in Primus Financial) to Primus Asset Management, and in return received all 1,000 authorized and issues shares of Primus Asset Management.

2.    Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of Primus Guaranty and its subsidiaries and are presented in accordance with U.S. generally accepted accounting principles. Significant intercompany transactions have been eliminated in consolidation.

The consolidated financial statements represent a single reportable segment, as defined in Statement of Financial Accounting Standards ("SFAS") No. 131, Disclosures about Segments of an Enterprise and Related Information. During the period March 14, 2002 through June 30, 2004, Primus Asset Management supported only Primus Financial's activities; its third party operations in the second half of 2004 were not significant. Results from Primus Re's activities had no significant impact on the Company's 2003 and 2004 results.

The consolidated financial statements are presented in U.S. dollar equivalents. At December 31, 2004, Primus Financial's credit swap activities were conducted in U.S. dollars and Euros.

Certain 2003 and 2002 amounts have been reclassified to be consistent with the 2004 presentation.

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Management's estimates and assumptions are used mainly in estimating the fair value of credit swaps and the deferred tax asset valuation.

Cash and Cash Equivalents

Primus Guaranty defines cash equivalents as short term, highly liquid securities and interest earning deposits with original maturities or maturities at time of purchase of 90 days or less.

Short-Term Investments

Short-term investments are classified as available for sale by the Company and are securities with original maturities or maturities at time of purchase ranging from 91 days to two years. These securities are recorded on the balance sheet at cost, which approximates fair value.

Interest Income

The Company earns interest income on its cash and cash equivalents, including commercial paper and other securities, and on short-term investments, which include the accretion of discount and amortization of the premium recorded upon the acquisition of such securities.

Credit Swaps

Credit swaps are over-the-counter ("OTC") derivative financial instruments and are recorded at fair value in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Obtaining the fair value (as such term is defined in SFAS No. 133) for such instruments requires the use of management judgment. These instruments are valued using pricing models based on the net present value of expected future cash flows and observed prices for other OTC transactions bearing similar risk characteristics. The fair value of these instruments appears on the consolidated statement of financial condition as unrealized gains or losses on credit swaps. The Company does not believe that its credit swaps fall outside the scope of the guidance of SFAS No. 133 paragraph 10d, as amended by SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, because there is no contractual requirement that the protection purchaser be exposed to the underlying risk.

Net credit swap revenue includes realized and unrealized gains and losses on credit swaps and net premiums earned.

Premiums are taken into income as they are earned over a specified time period. Accrued Premiums on credit swaps represent premiums earned but not yet payable by Primus Financial's counterparty. Premiums Receivable on credit swaps represents premiums that are both earned by and payable to Primus Financial.

Foreign Currency

Primus Financial began transacting credit swaps denominated in Euros during February 2003. Assets and liabilities denominated in non-U.S. dollar currencies are translated into U.S. dollar equivalents using year-end spot foreign exchange rates. Gains and losses resulting from translation to U.S. dollar equivalents are reflected in foreign exchange revaluation on the statement of operations for the year ended December 31, 2004. For the year ended December 31, 2003, the foreign currency revaluation was not significant and is included in net credit swap revenue in our statement of operations.

57

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

Financial Guarantee-Insurance Contracts

The Company has undertaken a limited amount of financial guarantee business through its subsidiary Primus Re. Financial guarantees are insurance contracts that contingently require the guarantor to make payments to the guaranteed party. The Company designs its guarantee contracts to qualify as non-derivatives in accordance with the scope exception under paragraph 10d of SFAS 133 as amended by SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This scope exception requires that the guaranteed party be exposed to loss both at inception and over the life of the contract, and incurrence of loss must be preconditions for payment under the contract and that these losses are based on payments to be made solely to reimburse the guaranteed party for failure of the debtor to satisfy its required payment obligations under a nonderivative contract, either at pre-specified payment dates or accelerated payment dates as a result of the occurrence of an event of default (as defined in the financial obligation covered by the guarantee contract) or notice of acceleration being made to the debtor by the creditor. Thus, the Company accounts for its financial guarantee contracts in accordance with SFAS No. 60, Accounting and Reporting by Insurance Enterprises. This requires that premiums are deferred and recognized over the life of the contract and that losses are recorded in the period that they occur based on an estimate of the ultimate cost of losses incurred.

The Company does not actively offer financial guarantee insurance. Rather, it is an alternative the Company has available when a counterparty requests an insurance contract instead of a credit swap. Generally, a counterparty's choice of a financial guarantee insurance contract versus a credit swap is determined by economic terms available in the marketplace as well as regulatory and accounting considerations. Also, the purchaser of an insurance contract cannot submit a claim for payment unless it has an insurable loss, whereas the purchaser of a credit swap need not have actual exposure to the underlying risk.

Insurance Premiums Earned and Receivable and Related Expenses

In exchange for providing financial guarantee protection to counterparties, Primus Re receives premiums over the life of the contract. The amount expected over the life of the policy is reflected in the statement of financial condition and will be reduced as payments are received quarterly in advance.

The accounts of Primus Re are not deemed to be separate accounts under SOP 03-01, Accounting & Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts for Separate Accounts, since investment performance is not passed through to the contract holder.

Policy acquisition costs include only those expenses that relate primarily to, and vary with, premium production. Such costs generally include compensation of employees involved in underwriting and policy issuance functions, certain rating agency fees, state premium taxes and certain other underwriting expenses. No costs have been deferred by the Company as of December 31, 2004, as any such amounts have been immaterial.

Deferred Financial Guarantee Premiums

Unearned premiums related to the financial guarantee protection provided are used to establish the liability at inception. This liability is reflected in income on a straight-line basis over the period the risk protection is provided.

Unpaid Losses and Loss Expenses on Financial Guarantees

Liabilities for unpaid losses and loss expenses include the accumulation of individual case estimates for claims reported as well as estimates of incurred but not reported claims and estimates of

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

loss settlement expenses on the obligations it has insured. Estimates will be based upon historical industry loss experience modified for current trends as well as prevailing economic, legal and social conditions. Any changes in estimates are reflected in operating results in the period in which the estimates changed. At December 31, 2004 and 2003, the Company had no loss reserves recorded.

Property, Plant and Equipment

Fixed assets are stated at cost less accumulated depreciation and amortization. Fixed assets include computer hardware, telephone equipment, furniture and fixtures, and office equipment, which are depreciated using a straight-line method over the estimated useful lives of the assets, and leasehold improvements which are amortized using the straight-line method over the shorter of the lease term or estimated useful life.

Internal Use Software Costs

During the Company's development stage, the Company had various aspects of its proprietary technology platform under applications development. The primary applications related to (1) the development of the capital models on which Primus Financial in part has its public ratings based, and (2) the transactional platform which maintains the records of each transaction, provides pricing and analytical support for Primus Financial's credit swap business, and provides additional support in the form of automated documentation creation and financial data necessary to run Primus Financial's business.

The software and related costs of developing the capital model and transactional platform were capitalized in accordance with AICPA Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. These costs are being amortized over five years on a straight-line basis. During 2003, it was determined that $3.2 million of certain assets were no longer necessary for the Company's business and were written off. These costs are included in "Fixed asset depreciation and amortization" in the consolidated statement of operations. Software development amounts expensed were $469 thousand, $487 thousand and $302 thousand for the years ended December 31, 2004, 2003 and 2002, respectively, as they did not qualify for capitalization.

Income Taxes

Income tax expense is computed in accordance with the requirements of SFAS No. 109, Accounting for Income Taxes, which prescribes the asset and liability approach to accounting for income taxes. The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities.

Employee Compensation Plans

In 2003, the Company adopted the fair value approach on a prospective basis for recording stock-based employee compensation in accordance with the fair value method prescribed by SFAS No. 123, Accounting for Stock-based Compensation, ("SFAS 123"), as amended by SFAS No. 148, Accounting for Stock Based Compensation—Transition and Disclosure. Compensation expense is recognized based on the fair value of stock options, restricted shares and restricted share units ("RSU") granted over the related vesting period. The fair value of the stock options granted is determined through the use of an option-pricing model.

Prior to 2003, the Company applied APB No. 25 "Accounting for Stock Issued to Employees," and related Interpretations ("APB 25") in accounting for its employee compensation plans. Under APB 25, the fair market value of shares of stock and RSUs awarded to employees are expensed by allocating their aggregate grant date fair value over the vesting period. For stock options, compensation is measured as the excess, if any, of fair market value of the stock over the exercise price at the date of grant.

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

See "Recent Accounting Pronouncement" for a discussion of SFAS 123R, "Share-Based Payment" ("SFAS 123R"), which was issued in December 2004.

Recent Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46, or FIN 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." The Interpretation defines "variable interests" and specifies the circumstances under which consolidation of special purpose entities will be dependent upon such interests. In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), or FIN 46R, which effectively modified and clarified certain provisions of FIN 46, as originally issued, and modified the effective date for certain entities.

The provisions of FIN 46, as revised, were adopted as of December 31, 2003, for our interests in all VIEs. The result was the derecognition of the MMP Receipts issued by the Trust and the recognition of the Primus Financial Cumulative Preferred Stock issued by Primus Financial to the Trust. The adoption of FIN 46R had no impact on our financial statements.

In December 2004, the FASB issued SFAS 123R, which replaces SFAS 123 and supersedes APB 25. SFAS 123R eliminates the choice of alternative accounting methods, and requires that all entities follow the fair value based method of SFAS 123. Public entities will be required to apply Statement 123R as of the first interim or annual reporting period that begins after June 15, 2005. The adoption of SFAS 123R is not expected to have a significant impact on our financial statements.

In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions". APB Opinion No. 29 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance, that is, if the future cash flows of the entity are not expected to change significantly as a result of the exchange. The provisions of this statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company anticipates that SFAS 153 will not have an impact on our financial statements.

3.    Initial Public Offering

Primus Guaranty completed an IPO on October 5, 2004, listing its shares on the New York Stock Exchange, or, NYSE. The Company issued 9,143,493 shares at a price $13.50. The proceeds to the Company were $110.7 million, net of the underwriting discount and offering expenses. Primus Guaranty has subsequently contributed $60.0 million of the IPO proceeds to Primus Financial to support the growth of its credit swap business. Primus Guaranty has invested the remaining net proceeds in short-term money market instruments, pending utilization in businesses related to the credit markets. The completion of the IPO caused the Company to vest one-half of the remaining unvested stock, restricted stock units and options held by employees at the date of the IPO. The Company recognized an expense of approximately $3.3 million in the fourth quarter of 2004 as a result of this accelerated vesting.

4.    Cash and Cash Equivalents

The Company and its subsidiaries invest only in obligations of the United States of America or direct debt obligations of U.S. Agencies rated AAA and Aaa by the respective Rating Agencies, and commercial paper rated A-1 and P-1 by the respective Rating Agencies.

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

As of December 31, 2004 and 2003, the Company's cash and cash equivalents include U.S. government agency obligations and money market funds. All outstanding obligations mature within 90 days.

5.    Short-Term Investments

Short-term investments included obligations of the United States of America or direct debt obligations of U.S. Agencies rated AAA and Aaa by the respective Rating Agencies, which have original maturities or maturities at time of purchase between 91 days and two years.

As of December 31, 2004 and 2003, the Company's short-term investments consisted entirely of short-term U.S. government agency obligations, which mature within two years.

6.    Primus Re Financial Guarantee Transactions

On December 31, 2003, Primus Re wrote three-year financial guarantee insurance policies on three separate reference entities. Primus Re then transferred all of its risk to Primus Financial through back-to-back credit swaps referencing the same reference entities as the financial guarantee contracts and with the same maturities. Any payments required to be made under the financial guarantee contracts to the insured will be covered by a payment received by Primus Re from Primus Financial. These credit swaps and the related effects on results of operations are eliminated in consolidation. The aggregate notional amount of the credit swaps is $87.0 million at December 31, 2004. Primus Re's obligation to pay on the insurance policies requires that (i) the insured suffers a default, (ii) all premiums are paid up until the date that the insured delivers a Notice of Payment to Primus Re and (iii) the Notice of Payment is made to Primus Re in writing. The maximum payout under the three guarantee insurance contracts would be $56.5 million. This amount is equal to the maximum amount receivable under the offsetting credit swaps, after deducting stipulated amounts representing the assumed recoveries on reference entity obligations with a notional amount of $87.0 million.

7.    Credit Swap Revenues and Portfolio

Net credit swap revenue as presented in the consolidated statement of operations comprises changes in the fair value of credit swaps, realized gains or losses on the termination of credit swaps and premium income or expense. The realized gains and losses on credit swaps represent realized gains and losses on unwound or assigned credit swaps. The realization of gains or losses on credit swaps will generally result in a reduction in unrealized gains or losses and accrued premium at the point in time realization occurs.

In exchange for providing credit protection to its counterparties, Primus Financial receives premium payments as a series of fixed cash flows. Premiums are taken into income as they are earned over a specified time period. Accrued premiums on credit swaps represent premiums earned but not yet payable by Primus Financial's counterparty. Premiums receivable on credit swaps represents premiums that are both earned by and payable to Primus Financial. When Primus Financial purchases credit protection from its counterparties, Primus Financial pays premiums as a series of fixed cash flows. The premium expense is recognized ratably over the life of the transaction as a component of net credit swap revenue.

In accordance with accounting principles generally accepted in the United States, the Company carries its credit swaps on its balance sheet at their fair value. Changes in the fair value of the Company's credit swap portfolio are recorded as unrealized gains or losses in the Company's consolidated income statement. If a credit swap has an increase in fair value during a period, the increase will add to the Company's net credit swap revenues for that period. Conversely, if a credit swap has a decline in fair value during the period, the decline will subtract from the Company's net

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

credit swap revenues for that period. Changes in the fair value of the Company's credit swap portfolio are a function of the notional amount and composition of the portfolio and prevailing market credit swap premiums for comparable credit swaps. The Company generally holds the credit swaps it sells to maturity, at which point, assuming no credit event has occurred, the cumulative unrealized gains and losses on each credit swap would equal zero. In general, the Company aggregates fair values of individual credit swaps by counterparty for presentation on the Company's statement of condition. If the aggregate total of fair values for a counterparty is a net gain, the total is recorded as a component of unrealized gains on credit swaps, at fair value in the statement of financial condition. If the aggregate total of fair values for a counterparty is a net loss, the total is recorded as a component of unrealized losses on credit swaps, at fair value in the statement of financial condition. Aggregation by counterparty is applied where a valid ISDA master agreement is in place with the counterparty, in instances where the Company does not yet have a valid ISDA master agreement with the counterparty, the fair values of individual swap transactions are recorded as components of unrealized gains or losses on credit swaps, at fair value, dependent upon whether the individual contract was at a gain or a loss.

As a general rule, when the Company sells credit protection, it intends to maintain the transaction until maturity. However, there are two sets of circumstances in which the Company could elect to terminate transactions prior to maturity, and the Company monitors its portfolio on a continuing basis to assess whether those circumstances are present.

First, whenever the Company receives new information suggesting that the credit quality of the underlying risk has deteriorated to a material degree, the Company considers the possibility of terminating the transaction, usually at a loss, to avoid the larger loss that could result if the credit swap were to remain in place until a credit event occurs. The principal factor that governs the Company's decision regarding termination in these circumstances is whether the Company believes that the underlying risk has become substantially greater than the level of risk the Company would choose to assume in entering into a new sale of credit default protection.

Second, the Company may also elect to terminate a transaction for which it has an unrealized gain based on one or more of the following considerations: the likelihood of further gains arising from the position, its view as to whether the capital dedicated to the position would be profitably reallocated, its total exposure to a particular Reference Entity, the total size of its portfolio in relation to its capital and the total size of its swap positions and exposures with a particular counterparty which might be reduced so that the counterparty may enter into additional swaps with the Company.

The Company terminates (or offsets) a credit swap in any one of three ways. The Company may negotiate an agreed termination through the original counterparty (an unwind). The Company may negotiate an assignment and novation of its rights and obligations under the credit swap to a third party (an assignment). As an alternative to terminating a transaction, the Company may enter into an equal and opposite transaction with a third party under which the Company purchases credit default protection on terms that match the terms of the original transaction (an offset). In this last case, both sides of the position may subsequently be unwound or assigned.

In the event of an unwind or assignment, the Company pays or receives a cash settlement negotiated with the counterparty or assignee, based on the fair value of the credit swap contract and the accrued premium on the swap contract at the time of negotiation. The amounts the Company pays or receives are recorded as a realization of fair value and as a realization of accrued premiums in the period in which the termination occurs.

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

The tables below present the components of credit swap revenues for the years ended December 31, 2004, 2003 and 2002. The Company distinguishes among credit swaps sold, credit swaps purchased as short-term investments and credit swaps purchased to offset the credit risk on credit swaps previously sold.

Net credit swap revenues for the year ended December 31, 2004 (in thousands)

				Premium income (expense)				Realized gains				Realized (losses)				Change in unrealized gains/(losses)				Totals
Credit swaps sold				$	43,494			$	5,533			$	(1,139	)		$	1,899			$	49,787
Credit swaps purchased as short-term investments					(927	)			1,260				(132	)			(2,225	)			(2,024	)
Credit swaps purchased to offset credit risk on certain swaps sold					(92	)			—				—				58				(34	)
Totals				$	42,475			$	6,793			$	(1,271	)		$	(268	)		$	47,729

Net credit swap revenues for the year ended December 31, 2003 (in thousands)

				Premium income (expense)				Realized gains				Realized (losses)				Change in unrealized gains/(losses)				Totals
Credit swaps sold				$	39,112			$	18,313			$	(264	)		$	46,663			$	103,824
Credit swaps purchased as short-term investments					(19	)			28				—				23				32
Credit swaps purchased to offset credit risk on certain swaps sold					(135	)			—				(448	)			53				(530	)
Totals				$	38,958			$	18,341			$	(712	)		$	46,739			$	103,326

Net credit swap revenues for the year ended December 31, 2002 (in thousands)

				Premium income (expense)				Realized gains				Realized (losses)				Change in unrealized gains/(losses)				Totals
Credit swaps sold				$	12,155			$	3,145			$	(302	)		$	105			$	15,103
Credit swaps purchased to offset credit risk on certain swaps sold					(24	)			—				—				(318	)			(342	)
Totals				$	12,131			$	3,145			$	(302	)		$	(213	)		$	14,761

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

The notional amount, fair value and average fair value of open credit swap transactions entered into with third parties at December 31, 2004 and 2003 are as follows (in thousands):

				December 31
				2004				2003
Credit Swaps Sold
Gross notional amount				$	10,544,728			$	6,291,375
Fair value:
Asset					48,619				46,571
Liability					159				68
Average fair value:
Asset					34,131				11,193
Liability					432				635
Credit Swaps Purchased
Gross notional amount				$	468,175			$	130,000
Fair value
Asset					0				141
Liability					2,202				118
Average fair value
Asset					185				5
Liability					648				4

"Asset" in the above table represents unrealized gains on credit swaps while "Liability" represents unrealized losses on credit swaps. All credit swaps are subject to netting arrangements that have been contractually established with each counterparty under an ISDA Master Agreement. The notional amounts of the credit swap contracts in the preceding table are presented on a gross basis and the fair values of such contracts are presented net by counterparty. The average fair value in the above table was calculated on a daily basis. At December 31, 2004, Primus Financial had three derivative transactions with its affiliate, Primus Re, totaling $87 million in notional principal.

Under the terms of Primus Financial's operating guidelines, derivatives transactions can only include credit swaps. Credit swaps are derivative transactions that obligate one party to the transaction (the "Seller") to pay an amount to the other party to the transaction (the "Buyer") should one of a specified group of events ("Credit Events") be incurred by an unrelated third party (the "Reference Entity") specified in the contract. The amount to be paid by the Seller will either be (a) the notional amount of the transaction, in exchange for which the Seller must be delivered a defined obligation of the Reference Entity (called physical settlement), or (b) the difference between the current market value of a defined obligation of the Reference Entity and the notional amount of the transaction (called cash settlement). In exchange for incurring the potential of a Credit Event-generated loss, the Seller will receive a fixed premium for the term of the contract (or until the occurrence of a Credit Event). The fixed premium is generally paid quarterly in arrears over the term of the transaction.

All transactions entered into between the Buyer and the Seller are subject to an ISDA Master Agreement executed by both parties. The Master Agreement allows for the consolidation of the market exposures and termination of all transactions between the Buyer and Seller in the event a Default (as defined by the Master Agreement) is incurred by either party.

Primus Financial is primarily a Seller of credit swaps, although it may also buy credit swaps to off-set the risks it has incurred as a Seller. Credit swaps purchased to off-set risks do not qualify as hedges in accordance with SFAS No. 133. In addition, Primus Financial is permitted to purchase credit swaps as a limited percentage of its overall portfolio (represented as Credit Swaps Purchased in the

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

below tables). The company's operating guidelines and board authorization limit the notional amount of credit swaps purchased to seven and a half percent of the notional amount of credit swaps sold, allowing Primus Financial to seek short term market appreciation. The primary risks inherent in the Company's activities are (a) that Reference Entities specified in its credit swap transactions will incur Credit Events (Credit Events may include any or all of the following: bankruptcy, failure to pay, repudiation or moratorium, and modified or original restructuring) that will require Primus Financial to make payments to the Buyers of the transactions, (b) where Primus Financial is a Buyer of a credit swap and a Credit Event occurs, the Seller fails to make payment to the Company, and (c) that Buyers of the transactions from Primus Financial will default on their required premium payments at times when the fair value of the underlying transactions are positive to Primus Financial. During 2004, 2003 and 2002, none of these events had occurred.

The tables below summarize the notional amounts and fair value at risk to performance by Reference Entities and Counterparties of credit swap transactions, which are recorded at fair value (summarized by credit rating) as of December 31, 2004 and 2003. Fair Value is the fair value of all transactions after consideration of offsetting exposures under Master Agreements with counterparties.

Risk off-set transactions are reflected in the below tables as part of Credit Swaps Sold. The total notional amounts of risk off-set transactions were $5 million and $5 million during 2004 and 2003, respectively. Fair value of the risk offset transactions equaled $(206) thousand and $(264) thousand at December 31, 2004 and 2003, respectively.

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

(in thousands and U.S. dollar equivalent)

				December 31
				2004								2003
Moody's Rating Category				Notional Amount				Fair Value				Notional Amount				Fair Value
Reference Entity
Credit Swaps Sold:
Aaa				$	651,270			$	866			$	405,500			$	1,680
Aa					1,917,131				5,609				1,002,640				6,492
A					4,310,452				22,511				2,940,208				23,208
Baa					3,642,330				19,295				1,943,027				15,123
Ba					23,545				179				—				—
Total				$	10,544,728			$	48,460			$	6,291,375			$	46,503
Credit Swaps Purchased:
Aaa				$	47,090			$	(158	)		$	20,000			$	(51	)
Aa					13,545				(44	)			—				—
A					209,815				(803	)			70,000				(16	)
Baa					160,635				(969	)			40,000				90
NR					37,090				(228	)			—				—
Total				$	468,175			$	(2,202	)		$	130,000			$	23
Counterparty Buyer
Credit Swaps Sold:
Aaa				$	5,000			$	49			$	12,000			$	41
Aa					8,304,867				35,922				4,529,351				33,039
A					2,234,861				12,489				1,750,024				13,423
Total				$	10,544,728			$	48,460			$	6,291,375			$	46,503
Counterparty Seller
Credit Swaps Purchased:
Aa				$	387,858			$	(1,699	)		$	75,000			$	41
A					80,317				(503	)			55,000				(18	)
Total				$	468,175			$	(2,202	)		$	130,000			$	23

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

				December 31
				2004								2003
S&P Rating Category				Notional Amount				Fair Value				Notional Amount				Fair Value
Reference Entity
Credit Swaps Sold:
AAA				$	627,725			$	822			$	395,500			$	1,634
AA					1,826,628				4,462				931,156				5,648
A					4,863,204				25,569				3,202,996				24,792
BBB					3,217,171				17,536				1,761,723				14,429
BB					10,000				71				—				—
Total				$	10,544,728			$	48,460			$	6,291,375			$	46,503
Credit Swaps Purchased:
AAA				$	57,090			$	(198	)		$	20,000			$	(51	)
AA					27,090				(109	)			—				—
A					216,270				(940	)			75,000				(3	)
BBB					167,725				(955	)			35,000				77
Total				$	468,175			$	(2,202	)		$	130,000			$	23
Counterparty Buyer
Credit Swaps Sold:
AAA				$	5,000			$	49			$	12,000			$	41
AA					6,643,559				27,941				3,191,325				21,729
A					3,896,169				20,470				3,088,050				24,733
Total				$	10,544,728			$	48,460			$	6,291,375			$	46,503
Counterparty Seller
Credit Swaps Purchased:
AA				$	290,768			$	(1,433	)		$	70,000			$	40
A					177,407				(769	)			60,000				(17	)
Total				$	468,175			$	(2,202	)		$	130,000			$	23

Primus Financial's operating guidelines impose various limits on the geographical concentration of its business based on the country of domicile of each Reference Entity. Additionally, Primus Financial's counterparties are global financial institutions with whom it has entered into Master Agreements that consolidate the counterparty risk to one office of that counterparty. For the year ended December 31, 2004, three counterparties each generated greater than ten percent of the Company's total premium revenue. For the year ended December 31, 2003, five counterparties each generated greater than ten percent of the Company's total premium revenue.

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

The table below shows the geographical distribution of Primus Guaranty's credit swap portfolio by domicile of the Reference Entity and domicile of the counterparty (in thousands and U.S. dollar equivalent):

				December 31
				2004								2003
Country of Domicile				Notional Amount				Fair Value				Notional Amount				Fair Value
Credit Swaps Sold
By Reference Entity:
U.S.				$	5,262,363			$	26,899			$	3,503,500			$	27,258
Other G-7 countries					3,478,284				14,962				1,999,503				13,965
Other Europe					1,525,081				5,301				676,372				4,188
Bermuda					74,000				380				37,000				217
Others					205,000				918				75,000				875
Total				$	10,544,728			$	48,460			$	6,291,375			$	46,503
By Counterparty:
U.S.				$	5,243,169			$	22,797			$	2,948,842			$	20,952
Other G-7 countries					3,049,740				15,146				1,731,418				14,975
Other Europe					2,189,819				10,313				1,611,115				10,576
Others					62,000				204				—				—
Total				$	10,544,728			$	48,460			$	6,291,375			$	46,503
Credit Swaps Purchased
By Reference Entity:
U.S.				$	265,000			$	(1,282	)		$	115,000			$	45
Other G-7 countries					162,540				(828	)			—				—
Other Europe					40,635				(92	)			10,000				4
Others					—				—				5,000				(26	)
Total				$	468,175			$	(2,202	)		$	130,000			$	23
By Counterparty:
U.S.				$	215,635			$	(935	)		$	75,000			$	(60	)
Other G-7 countries					185,450				(879	)			35,000				121
Other Europe					47,090				(231	)			20,000				(38	)
Others					20,000				(157	)			—				—
Total				$	468,175			$	(2,202	)		$	130,000			$	23

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

The table below shows the distribution of Primus Guaranty's credit swap portfolio by year of maturity for December 31, 2004 and 2003 (in thousands and U.S. dollar equivalent):

				December 31
				2004								2003
				Notional Amount				Fair Value of Transaction				Notional Amount				Fair Value of Transaction
Credit Swaps Sold
Year of Maturity
2004				$	—			$	—			$	1,311,898			$	2,200
2005					2,841,441				3,859				1,227,169				5,807
2006					1,014,554				1,340				270,640				1,272
2007					2,583,503				20,442				2,197,580				26,243
2008					1,184,157				11,427				1,257,798				11,060
2009					2,901,073				11,423				26,290				(79	)
2010					20,000				(31	)			—				—
Total				$	10,544,728			$	48,460			$	6,291,375			$	46,503
Credit Swaps Purchased
Year of Maturity
2007				$	10,000			$	(43	)		$	60,000			$	—
2008					15,000				(21	)			60,000				35
2009					443,175				(2,138	)			10,000				(12	)
Total				$	468,175			$	(2,202	)		$	130,000			$	23

8.    Fixed Assets

Fixed assets include computer hardware, telephone equipment, furniture and fixtures, and office equipment, which are depreciated using a straight-line method over the estimated useful lives of five years, and leasehold improvements which are amortized using the straight-line method over the shorter of the lease term or estimated useful life of ten years. At December 31, 2004 and 2003, fixed assets consist of the following (in thousands):

				December 31
				2004				2003
Asset category
Furniture and fixtures				$	487			$	382
Computers					131				92
Office equipment					50				50
Telephones					114				113
Leasehold improvements					1,510				1,273
					2,292				1,910
Less accumulated depreciation and amortization					493				259
Total fixed assets				$	1,799			$	1,651

For the years ended December 31, 2004 and 2003, the Company incurred $234 thousand and $214 thousand of depreciation expense on the above assets, respectively.

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

9.    Long Term Debt of Subsidiary

Primus Financial issued $75.0 million of subordinated deferrable interest notes on July 23, 2004 that mature in July 2034. The notes are subordinated in right of payment to the prior payment in full of all existing and future senior indebtedness of the company, including counterparty claims. The notes are redeemable at the option of Primus Financial, in whole or in part, on any auction date, at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid interest thereon to the redemption date. The interest rate on the notes was fixed on the issue date at a rate of 2.57% (LIBOR plus 20 basis points) for a period of one year. Interest was payable (i) on October 25, 2004 and January 25, 2005, and is payable on April 25, 2005, and July 25, 2005, (ii) for each subsequent 28-day period based on an auction rate set on the prior business day and (iii) for each subsequent special rate period, on each date so designated by the company after electing such rate period, provided that if the period is one year or longer, interest shall be payable at least quarterly. The Company incurred interest expense of $867 thousand on these subordinated notes for the year ended December 31, 2004. At December 31, 2004, the carrying value of the subordinated notes approximates fair value.

Costs associated with the issuance of this debt were $1.1 million and are included in the Company's consolidated statement of financial condition as debt issuance costs, and amortized over the life of the debt. Amortization of debt issuance costs is included in interest expense in our consolidated statement of operations.

10.    Income taxes

Primus Guaranty is a Bermuda company. Primus Guaranty believes that it is not involved in the active conduct of a trade or business in the U.S. For U.S. tax purposes, Primus Guaranty will be treated either as a controlled foreign corporation or as a passive foreign investment company by its U.S. shareholders. As such, Primus Guaranty has not provided for any federal or state and local income taxes in its separate financial statements. However, on a consolidated basis, it has provided for income taxes for certain of its subsidiaries, which are described below. Primus Guaranty was incorporated in Bermuda to domicile itself in a jurisdiction that is internationally recognized as a base for financial companies and in a jurisdiction that has an efficient and predictable corporate tax regime.

For U.S. tax purposes, Primus Bermuda, originally Primus (Barbados) Ltd., will be treated either as a controlled foreign corporation or as a passive foreign investment company by its U.S. shareholders. Primus Bermuda was interposed between Primus Guaranty and Primus Group Holdings because Barbados had a tax treaty with the United States and Bermuda has no relevant tax treaty. The Barbados tax treaty, however, was recently amended. Therefore, as of December 31, 2004, we redomiciled Primus (Barbados), Ltd. as Primus (Bermuda), Ltd., or Primus Bermuda, in Bermuda.

Primus Guaranty does not have any full time employees in, nor does the Company lease or own any real property in, Bermuda or Barbados.

From July 16, 1999 through May 21, 2002, Primus Financial's predecessor, Primus Financial Products, Inc. (the "Corporation"), was a corporation for U.S. tax purposes and for the period from March 14, 2002 through May 21, 2002, earned interest income of $349 thousand, on which federal, state, and local taxes of approximately $188 thousand were payable.

As of May 22, 2002, the Corporation was converted to Primus Financial, a limited liability company organized under Delaware law, and its parent was also converted to a limited liability company organized under Delaware law, with all of the interests in its parent being held by Primus Bermuda, a non-US corporation. As a result, from May 22, 2002 through December 17, 2002, Primus Financial was treated as a "disregarded entity" for U.S. tax purposes, and the results of its operations were treated as the operations of a branch of its foreign parent corporation, Primus Bermuda. As a

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

disregarded entity, Primus Financial was not itself subject to U.S. net income taxation. In addition, because Primus Financial's activities in the U.S. were confined to holding investments in debt instruments and credit swaps for its own account, Primus Financial believes that its activities fall within the provisions of Internal Revenue Code ("IRC") Section 864(b) and therefore does not believe that Primus Bermuda, a non-U.S. corporation, should be subject to taxation in the U.S. on a net income basis as a result of its interest in Primus Financial. Accordingly, Primus Financial did not provide for any income taxes in its financial statements for this period.

If the activities of Primus Financial, and thus Primus Bermuda, were found to fall outside the provisions of IRC Section 864(b), and Primus Financial, and thus Primus Bermuda, were found to be subject to U.S. federal, state and local corporate income tax, it is difficult to predict the exact treatment that would apply to Primus Bermuda and, therefore, to estimate the resulting income tax expense. However, were Primus Bermuda to be subject to income tax, at a combined U.S. federal, New York State and New York City corporate income tax rate of 46%, on its GAAP income, then its income tax expense (excluding interest and penalties) would have been approximately $13.1 million for 2004, $37.0 million for 2003 and $80,000 for 2002. These figures assume that Primus Financial is not deemed to be making distributions to Primus Bermuda; such distributions would subject Primus Bermuda to an additional U.S. federal branch profits tax.

As of December 19, 2002, Primus Financial issued a second class of equity interests (the Preferred Stock issuance discussed in Note 11), and as a result Primus Financial was treated as a partnership for U.S. income tax purposes for the period from December 19, 2002 onward. All of Primus Financial's items of taxable income and expense flow through to its interest-holders for U.S. federal income tax purposes and any taxes that may be attributable to such items are the responsibility of the interest-holders. Based on the application of the provisions of IRC Section 864(b) and the investment nature of its operations, Primus Financial continues to believe that Primus Bermuda, a non-U.S. corporation, will not be subject to U.S. net income taxes with respect to its interest in Primus Financial.

Primus Asset Management has entered into a Services Agreement with Primus Financial, whereby Primus Asset Management provides services to Primus Financial including management, consulting and information technology. Since Primus Asset Management is a U.S. domiciled corporation it is subject to U.S. income taxes and income taxes of other taxing jurisdictions on fees received from Primus Financial.

The significant components of the consolidated (provision)/ benefit for income taxes for the years ended December 31, 2004, 2003 and 2002 were as follows:

(in thousands)
				December 31
				2004				2003				2002
Current:
Federal				$	—			$	252			$	(157	)
State/City					(46	)			(80	)			(97	)
Total current					(46	)			172				(254	)
Deferred:
Federal					—				—				—
State/City					—				—				—
Total deferred					—				—				—
Total (provision)/benefit for income taxes				$	(46	)		$	172			$	(254	)

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

The Company's effective tax rate differs from the Bermudian federal statutory rate of zero percent mainly due to taxation of its U.S. subsidiary, Primus Asset Management, which is subject to U.S. federal income tax at a rate of 34 percent, as well as U.S. state and local capital taxes. The Bermuda Minister of Finance has given the Company a tax exemption certificate effective through 2016 that prevents the Company from being subject to tax in the event that any legislation is enacted that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax.

A reconciliation of the difference between the (provision)/benefit for income taxes and the expected tax provision at the applicable zero percent domestic rate for the years ended December 31, 2004, 2003, and 2002, is provided below:

(in thousands)
				2004				2003				2002
U.S. federal income tax (provision)/benefit on Primus Asset Management's taxable income/(loss)				$	—			$	252			$	(157	)
U.S. state and local tax (provision)					(46	)			(80	)			(97	)
Total income tax (provision)/benefit				$	(46	)		$	172			$	(254	)

The Company has a net deferred tax asset of $9.3 million, $5.9 million and $4.5 million as of December 31, 2004, 2003 and 2002, respectively. The net deferred tax asset is primarily comprised of stock compensation expense and, capitalized costs and pre-operating formation costs which are being amortized for tax purposes. In addition, included within the gross deferred tax assets are tax effected net operating losses of $3.9 million related to the net operating loss of $281 thousand for 2002, $1.8 million for 2003 and $1.8 million for 2004. The Company had previously estimated a 2003 net operating loss estimate of $145 thousand. The completed 2003 tax return showed an actual net operating loss of $1.8 million, which necessitated a true-up in 2004 to the deferred tax asset and to the valuation allowance of $1.7 million. Net operating losses will begin to expire in the year 2022 if not utilized.

The Company has recorded a 100 percent valuation allowance against its deferred tax asset because management has determined that it is more likely than not that the deferred tax asset will not be realized due to Primus Asset Management's history of net operating losses and inability to generate future taxable income sufficient to utilize such deferred tax asset. A rollforward of the valuation allowance against Primus Asset Management's deferred tax asset is provided below.

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

The components of the net deferred tax asset at December 31, 2004, 2003 and 2002, are as follows:

(in thousands)
				December 31
				2004				2003				2002
Deferred tax assets
Capitalized and pre-operating formation costs				$	2,641			$	5,408			$	4,428
Stock compensation					3,270				397				—
Net operating losses					3,873				426				281
Gross deferred tax asset					9,784				6,231				4,709
Deferred tax liability
Stock compensation					—				—				(118	)
Depreciation					(477	)			(317	)			(52	)
Gross deferred tax liability					(477	)			(317	)			(170	)
Net deferred tax asset					9,307				5,914				4,539
Valuation allowance					(9,307	)			(5,914	)			(4,539	)
Net deferred tax asset after valuation allowance				$	—			$	—			$	—

The changes in the valuation allowance for the deferred tax asset for the years ended December 31, 2004, 2003 and 2002, are as follows:

				December 31
(in thousands)				2004				2003				2002
Balance at beginning of period				$	5,914			$	4,539			$	3,182
Capitalized and pre-operating formation costs					(2,767	)			980				1,246
Stock compensation					2,873				515				(118	)
Tax depreciation/Other					(160	)			(265	)			(52	)
Net operating loss					3,447				145				281
Balance at end of period				$	9,307			$	5,914			$	4,539

The tax consequences of various restructurings that took place in 2002, as described above, include certain limitations, including those provided by Internal Revenue Code Section 382, which could limit the utilization of certain amortized costs as an offset against Primus Asset Management's taxable income.

11.    Preferred Securities of Subsidiary

On December 19, 2002, Primus Financial issued $110 million of perpetual Floating Rate Cumulative Preferred Securities ("Preferred Securities") in two series, Series I and Series II to a trust, (the "Trust"). The securities are held by Deutsche Bank Trust Company Americas, as custodian and auction agent. Pursuant to AICPA SOP 98-5, specific incremental costs directly attributable to the offering of the Trust preferred securities have been charged against these gross proceeds.

In conjunction with the receipt of the Securities, the Trust issued $100 million of Money Market Preferred Securities Custodial Receipts ("MMP") in two series, Series A and Series B, with a liquidation preference of $1,000 per share, to various institutional investors in a private placement. The Trust also issued $10 million of Variable Inverse Preferred Securities Custodial Receipts ("VIP"), which were retained by Primus Financial.

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

In 2003, the Company adopted FIN 46R and deconsolidated the Trust effective December 19, 2002. The preferred securities referred to in the financial statements are Primus Financial's Preferred Securities, which are shown net of the $10 million of VIP issued by the Trust that are held by Primus Financial.

Distributions to the Trust on the Preferred Securities are adjusted through the VIP to equal the distributions required on the MMP. The Series A MMP pays distributions every 28 days based upon an auction rate set on the prior business day. The Series B MMP began making dividend payments quarterly beginning April 21, 2003 and ended January 20, 2004, based on the annual auction rate of 2.25% set on December 19, 2002. The distribution rate was reset for another one year period on January 20, 2004, making quarterly dividend payments that began on April 21, 2004, at an auction rate of 2.11%. On January 19, 2005, the distribution rate was set at 4.0% for another one-year period, beginning quarterly distributions on April 18, 2005. After December 19, 2012, the Company may redeem the Preferred Securities, in whole or in part, on any distribution date at $1,000 per share plus accumulated and unpaid dividends.

12.    Shareholders' Equity

        Convertible Preferred Stock

On March 14, 2002, the Company issued 6,212,000 shares of Series A Convertible Voting Preferred Shares ("Series A Preferred Stock"), par value of $0.01 per share, at a price of $25 per share. Each share was convertible at any time into 38.57 shares (4.8262548 shares after adjusting for the reverse split) of the Company's common stock ("Common Stock").

In connection with the Company's IPO on September 30, 2004, the Series A Preferred Stock was automatically converted into 29,980,691 shares of Common Stock.

        Common Stock

Primus Guaranty had 42,780,033 and 2,600,000 shares of Common Stock issued and outstanding at December 31, 2004 and 2003, respectively, each share having a par value of $0.08.

        Warrants

In connection with the Series A Preferred Stock issuance, XL Insurance (Bermuda) Ltd., a subsidiary of XL Capital Ltd., the lead investor in the Series A Preferred Stock, and Radian Group Inc., also an investor, were issued warrants on the closing date to purchase 1,414,746 and 1,061,059 common shares, respectively. Both warrants are exercisable at a price per common share of $5.18 until March 14, 2007.

On May 15, 2004, Radian Group, Inc. exercised its warrants that were convertible into 1,061,059 common shares at the exercise price of $5.18 per share, yielding proceeds to the Company of $5.5 million.

Radian Group Inc. was also issued warrants to purchase 1,093,877 common shares at an exercise price per common share of $5.18, exercisable until March 14, 2007, subject to a vesting schedule beginning on April 12, 2003 ("Vesting Warrants"). Exercise of the Vesting Warrants was conditional on the effectiveness on the vesting date of the Excess-of-Loss Insurance Policy issued by Radian Reinsurance, Inc. On February 1, 2003, Primus Financial terminated the Excess-of-Loss Insurance Policy effective March 30, 2003. As a result of the termination, on March 30, 2003, the full amount of Vesting Warrants was deemed unexercisable and null and void. No value has been ascribed to these warrants.

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

13.    Earnings per share

Basic earnings per share ("EPS") is calculated by dividing earnings available to common shareholders by the weighted-average number of common shares outstanding. Diluted EPS is similar to basic EPS, but adjusts for the effect of the potential issuance of common shares. The following table presents the computations of basic and diluted EPS:

				December 31,
				2004				2003				2002
Net earnings (loss) available to common shareholders				$	23,685			$	78,471			$	(3,069	)
Weighted-average basic shares outstanding					16,486				2,517				2,510
Effect of dilutive instruments
Series A Preferred Stock					22,381				29,981				—	(a)
Employee stock options					85				—	(a)			—
Restricted share units					361				300				—	(a)
Warrants					943				939				—	(a)
Dilutive potential shares					23,770				31,220				—
Diluted shares					40,256				33,737				2,510
Basic EPS				$	1.44			$	31.18			$	(1.22	)
Diluted EPS				$	0.59			$	2.33			$	(1.22	)

(a)

Securities (including those issuable pursuant to contingent stock agreements) that could potentially dilute basic EPS were not included in the computation of diluted EPS because to do so would have been anti-dilutive for the period presented. In 2003, employee stock options totaling 209,375 shares were excluded. In 2002, Series A Preferred Stock which converts to 29,981 thousand shares of Common Stock, restricted share units equal to 213,125 shares and warrants representing 3,569,682 shares of Common Stock were excluded.

14.    Commitments and Contingencies

        Leases

Primus Financial has leased its premises at 360 Madison Avenue, New York, New York from Madison 45 LLC at a fixed yearly rental (subject to certain escalations specified in the lease) until August 1, 2012. There are no material restrictions imposed by the lease agreement. The lease is categorized as an operating lease and future payments as of December 31, 2004 under the lease are as follows (in thousands):

2005				$	738
2006					756
2007					756
2008					756
2009 and thereafter					2,755
Total				$	5,761

Per the terms of the lease, Primus Financial was not required to make any rent payments until March 2003. Primus Financial recognizes rent expense from July 25, 2002 (the lease commencement date) based on a straight-line amortization of the total lease obligation. Primus Financial has recorded deferred rent payable on the statement of financial condition, which represents the amortized cost that will be payable in the future.

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

Primus Financial has an outstanding letter of credit for $756 thousand from Harris Trust and Savings Bank ("Harris Bank") related to this lease.

Statutory Requirements

Primus Re is an insurance company subject to Bermuda insurance regulations. Primus Re's ability to pay dividends and make capital distributions is subject to restrictions based principally on the amount of Primus Re's net premiums written and net loss reserves, subject to an overall minimum statutory capital and surplus of $1.0 million. In addition, Primus Re is required to maintain a minimum statutory liquidity ratio. At December 31, 2004, Primus Re's statutory capital and surplus was $1.01 million and the minimum amount required to be maintained was $1.0 million. At December 31, 2003, Primus Re's statutory capital and surplus was $1.02 million and the minimum amount required to be maintained was $1.0 million.

15.    Liquidity Facility

Primus Financial has obtained a Liquidity Facility from Harris Bank for $37.5 million. At December 31, 2004, the Liquidity Facility had a termination date of March 2005, and may be extended for successive one year periods upon the request of Primus Financial and agreement of Harris Bank. The Liquidity Facility may only be drawn upon in the event that (a) there is a Credit Event (as defined in each Credit Swap) on a credit swap sold by Primus Financial, (b) such credit swap requires Physical Delivery (as defined in each Credit Swap), (c) Primus Financial cannot otherwise make its required settlement as called for by the terms of the Credit Swap, and (d) Primus Financial has investment securities that are available to be pledged as collateral to secure any advances under the Liquidity Facility.

As of December 31, 2004 there have been no drawings under the Liquidity Facility.

16.    Related Party Transactions

Simultaneously with the sale of the Company's Series A Preferred Stock (see Note 12 above), the Company repaid outstanding advances from and retired 1.2 million shares of the Company's Series B Preferred Stock held by E. Capital Technologies, LLC and Primus Capital Advisors, LLC, affiliates of Jay H. Shidler, one of the Company's directors, for $11.73 million. The Company also repaid an aggregate of $5.0 million outstanding under a credit facility with Morgan Guaranty Trust Company of New York (now J.P. Morgan Chase & Co.) that certain affiliates of Mr. Shidler had drawn down.

On May 15, 2004, Radian Group, Inc. exercised its warrants (see Note 12 above).

17.    Employee Compensation Plans

Primus Guaranty has established three incentive compensation plans for the benefit of its employees.

        Initial Staffing Award Pool

During 2001, an award pool of Common Stock of Primus Guaranty totaling 1,500,000 shares was established (the "Initial Staffing Award Pool"). A total of 912,500 of these shares were awarded to selected members of Primus Asset Management ("Initial Awards"). These awards vested immediately. The Company estimated that the fair value of the Common Stock at the time the Initial Awards were granted was $0.08 per share.

Between March 14, 2002 and December 31, 2002, additional awards totaling 405,000 shares were made to certain additional employees from the Initial Staffing Award Pool ("Post-Funding Awards").

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

These awards vest ratably over a three-year period. Vesting is subject to certain terms, including the continued employment of the award recipient by Primus Asset Management. Upon the IPO by the Company, 50% of the then unvested shares vested.

The Company estimated the fair value of the Common Stock at the time the Post-Funding Awards were granted at $2.56 per share. Stock compensation expense of $226 thousand related to these awards was recorded in the 2002 consolidated statement of operations. These awards represent non-cash financing transactions.

During 2003, the Company awarded 183,000 shares from the Initial Staffing Award Pool, including the repurchase of certain vested shares from employees that left the employment of the Company. The Company estimated the fair value of the Common Stock during 2003 to be $6.93 per share. Stock compensation expense of $259 thousand related to these awards and $310 thousand related to the 2002 awards was recorded in the 2003 consolidated statement of operations.

During 2004, $1.1 million of stock compensation expense was recorded for Initial Staffing Award Pool grants outstanding, including $443 thousand for the accelerated vesting of stock in connection with the Company's IPO. There were no grants made during 2004.

        Annual Performance Bonus Plan

The Annual Performance Bonus Plan ("Bonus Plan") was created in 2002 and provides for the awards of cash to employees of Primus Asset Management and RSUs convertible at the option of the holder into Common Stock of Primus Guaranty. The total value of awards under the Bonus Plan is determined by the Compensation Committee of Primus Guaranty based on quantitative and non-quantitative measures of the performance of Primus Guaranty. Individual awards are then determined by the Chief Executive Officer of Primus Guaranty, and are subject to the approval of the Compensation Committee. The Compensation Committee also determines the awards to the executive officers. Under the terms of the plan individual awards will be made 75% in cash and 25% in RSUs (70% in cash and 30% in RSUs for certain members of management), with the number of RSUs determined on the basis of the value of the Common Stock at the end of the year preceding the award date or the date the award is authorized. The RSUs, or if converted, the Common Stock, vest ratably over a three year period on the anniversary dates of each award, with vesting subject to certain terms including the continued employment of the award recipient by Primus Asset Management. The Bonus Plan includes provision for the award of up to 1,393,652 RSUs and Options (discussed below) over a five year period beginning in February 2003.

In February 2003, the Company made awards under the Bonus Plan totaling $5.0 million for the period ended December 31, 2002, of which $3.75 million was awarded in cash and included as compensation expense, and $1.25 million was awarded in the form of RSUs for 181,000 shares of Common Stock (based upon the estimated fair value of Common Stock of $6.93 per share on the date of the awards). The value of the RSUs is being expensed as the RSUs are earned, beginning in 2003. The Company recognized $533 thousand and $387 thousand of expense for the years ended December 31, 2004 and 2003, respectively, including $231 thousand for the year ended December 31, 2004 for the accelerated vesting of stock in connection with the Company's IPO.

In January 2004, the Company approved awards under the Bonus Plan totaling $7.77 million for the period ended December 31, 2003, of which $4.75 million was awarded in cash and included as compensation expense, and $3.02 million was awarded in the form of RSUs for 191,000 shares of Common Stock (based upon the estimated fair value of Common Stock of $15.84 per share on the date of the awards). The value of the RSUs is expensed as the RSUs are earned over the vesting period. For the year ended December 31, 2004, stock compensation expense totaling $1.8 million was recognized for RSU grants issued under the Bonus Plan for the year ended December 31, 2004, including $1.1 million for the accelerating vesting of stock in connection with the Company's IPO.

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

        Stock Incentive Plan

The Stock Incentive Plan ("Incentive Plan") was created in 2002 and provides for the award of options on Common Stock of Primus Guaranty ("Options") to selected employees of Primus Asset Management. Individual awards are determined by the Chief Executive Officer of the Company, and are subject to the approval of the Compensation Committee. The Compensation Committee also determines the awards to the executive officers. The Options become exercisable ratably over a four year period on the anniversary date of each award, subject to certain terms including the continued employment of each recipient by the Primus Asset Management. The Options expire ten years from the date of grant and do not qualify for Incentive Stock Option Treatment under the Economic Recovery Tax Act of 1981 (ISO Treatment). Upon the IPO by the Company, 50% of the then unvested options vested. The total number of equity incentive awards authorized for issuance under the Incentive Plan is 12% of total authorized shares.

In January 2003, the Company approved awards under the Incentive Plan for 240,625 Options with an exercise price of $6.93 and which began to vest in February 2004. At December 31, 2004, 1,562 Options have been exercised. The Company recognized $412 and $190 thousand of stock compensation expense for the years ended December 31, 2004 and 2003, respectively, for these Options, including $236 thousand for the year ended December 31, 2004 for the accelerated vesting of Options in connection with the Company's IPO.

In January 2004, the Company approved awards under the Incentive Plan for 322,500 Options with an exercise price of $9.76 and which began to vest in February 2004. The Company recognized $2.0 million of stock compensation expense during 2004 for these Options, including $1.3 million for the accelerated vesting of Options in connection with the Company's IPO.

        2004 Share Incentive Plan

In October 2004, in connection with the Company's IPO, its board of directors approved the grant of options and performance common shares (the "IPO awards") in the aggregate amount of up to 2.4% of total authorized shares. The board of directors delegated to the compensation committee decisions regarding the terms and conditions of such awards, including the apportionment between options and performance common shares, the employees to whom such awards are to be granted and the performance factors required to earn such common shares. The performance factors are (i) the return on economic equity and (ii) the compound annual growth rate of the economic results over the following three years after grant.

The IPO awards of 259,063 performance Common Stock and 259,063 Options with an exercise price of $13.50 were granted in October 2004. The cost of the IPO awards is recognized over the vesting period for the awards in accordance with FAS 123. The cost of the performance Common Stock is recognized ratably from the date of the IPO to December 31, 2006. The cost of Options is recognized ratably over four years from the consummation of the IPO. The expense associated with the performance shares will be adjusted over the vesting period to reflect the projected actual award, which is based upon the aggregate performance of the company in the years 2004, 2005 and 2006. The Company recognized $461 thousand of expense for the year ended December 31, 2004 related to these awards.

In connection with the IPO, as discussed above, the Company recognized $3.3 million of expense for the accelerated vesting of stock and Options under the Company's Initial Staffing Award Pool, Bonus Plan, Stock Incentive Plan and 2004 Share Incentive Plan.

The fair value of each Option grant is estimated on the date of grant using the Black-Scholes option-pricing model using the following assumptions for the period indicated:

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

				Option Grant Date
				February 2003				February 2004				October 2004
Risk free interest rate					3.95	%			4.04	%			3.08	%
Volatility					39.2	%			27.9	%			28.3	%
Expected dividend yield					0.00				0.00				0.00
Expected option life				10 years				10 years				7 years

The following table is a summary of the information concerning outstanding and exercisable options at December 31, 2004.

				Option Grant Date
				February 2003								February 2004								October 2004								Total
				Number of shares				Weighted average exercise price				Number of shares				Weighted average exercise price				Number of shares				Weighted average exercise price				Number of shares				Weighted average exercise price
Granted					240,625			$	6.93				322,500			$	9.76				259,063			$	13.50				822,188			$	10.00
Exercised					(1,562	)		$	6.93				—			$	9.76				—			$	13.50				(1,562	)		$	6.93
Forfeited					(38,282	)		$	6.93				(6,250	)		$	9.76				—			$	13.50				(44,532	)		$	7.33
Options outstanding at December 31, 2004					200,781			$	6.93				316,250			$	9.76				259,063			$	13.50				776,094			$	10.28
Options exercisable at December 31, 2004					123,044			$	6.93				158,123			$	9.76				—				—				281,167			$	8.52
Average Contractual life				8.1 years								9.1 years								6.8 years								8.1 years

18.    Dividend Restrictions

Primus Financial's operating guidelines restrict the payment of dividends to once per year. The payment of dividends by Primus Financial is contingent upon a dividend payment not resulting in a capital shortfall under its operating guidelines and the dividend not exceeding 25% of Primus Financial's net income (excluding mark-to-market unrealized gains or losses on credit swaps). Primus Financial is further restricted from paying dividends under the terms of its Preferred Securities, unless all of the cumulative distributions on the Preferred Securities have been previously made or set aside. Primus Financial's $37.5 million credit facility also restricts payment of dividends by Primus Financial except as permitted by its operating guidelines. The Company's insurance subsidiary, Primus Re, is also subject to significant regulatory restrictions limiting its ability to declare and pay dividends.

Further, the Company is subject to Bermuda law and regulatory constraints that will affect its ability to pay dividends on its common shares and make other payments. Under the Bermuda Companies Act, each of Primus Guaranty, Primus Bermuda and Primus Re may not declare or pay a dividend out of distributable reserves if there are reasonable grounds for believing that each of us is, or would after the payment be, unable to pay the respective liabilities as they become due; or if the realizable value of our respective assets would thereby be less than the aggregate of our respective liabilities and issued share capital and share premium accounts.

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

19.    Quarterly Operating Results (unaudited)

2004:				First Quarter				Second Quarter				Third Quarter				Fourth Quarter
Total revenues				$	(2,325	)		$	6,659			$	24,665			$	24,756
Operating income (loss)					(8,190	)			219				18,004				13,698
Net income (loss)					(8,262	)			174				18,026				13,747
Basic earnings (loss) per share				$	(3.21	)		$	0.05			$	4.23			$	0.32
Diluted earnings (loss) per share				$	(3.21	)		$	0.01			$	0.51			$	0.31

2003:				First Quarter				Second Quarter				Third Quarter				Fourth Quarter
Total revenues				$	12,485			$	46,623			$	22,437			$	24,505
Operating income					6,673				40,495				16,605				14,526
Net income					6,536				40,527				16,583				14,825
Basic earnings per share				$	2.70			$	16.11			$	6.59			$	5.89
Diluted earnings per share				$	0.20			$	1.20			$	0.49			$	0.44

20.    Parent Company Financial Statements

Primus Guaranty, Ltd.
Statement of Financial Condition

(in thousands)				December 31
				2004				2003
Assets
Cash and cash equivalents				$	54,088			$	2,515
Intercompany receivable					6,951				1,434
Investment in subsidiaries, at equity					299,907				210,889
Accounts receivable					44				—
Prepaid assets					7				—
Total assets					360,997				214,838
Liabilities and shareholders' equity
Accounts payable					—				—
Total liabilities					—				—
Common stock					3,535				230
Additional Paid-in-capital					264,860				1,325
Convertible Preferred stock					—				143,908
Warrants					612				1,070
Retained earnings					91,990				68,305
Total Shareholders' Equity					360,997				214,838
Total liabilities and shareholders' equity				$	360,997			$	214,838

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

Primus Guaranty, Ltd.
Statement of Operations

(in thousands)				Year ended December 31
				2004				2003				2002
Revenues
Interest income				$	266			$	24			$	24
Foreign currency revaluation					115				—				—
Total revenues					381				24				24
Expenses
Exchange fees					194				—				—
Professional and legal fees					19				8				—
Bank fees					1				—				—
Total expenses					214				8				—
Income before equity in earnings of subsidiaries					167				16				24
Equity in earnings (losses) of subsidiaries, net of tax					23,518				78,455				(3,093	)
Net Income (loss)				$	23,685			$	78,471			$	(3,069	)

Primus Guaranty, Ltd.
Statement of Cash Flows

(in thousands)				Year ended December 31
				2004				2003				2002
Cash flows from operating activities:
Net income (loss)				$	23,685			$	78,471			$	(3,069	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Non-cash items included in net income (loss):
Equity in subsidiaries' earnings, net of tax					(23,518	)			(78,455	)			3,093
Increase (decrease) in cash resulting from changes in:
Intercompany receivable/payable					(5,517	)			—				121
Accounts receivable					(44	)			—				—
Prepaid expenses					(7	)			—				—
Net cash provided by (used in) operating activities					(5,401	)			16				145
Cash flows from investing activities
Investment in subsidiaries					(65,500	)			—				(142,324	)
Net cash used in investing activities					(65,500	)			—				(142,324	)
Cash flows from financing activities
Proceeds from issuance of common shares					116,974				—				—
Proceeds from issuance of preferred securities and warrants					—				—				144,678
Proceeds from exercise of warrants					5,500				—				—
Proceeds from issuance of preferred shares					—				—
Net cash provided by financing activities					122,474				—				144,678
Net increase in cash					51,573				16				2,499
Cash and cash equivalents at beginning of year					2,515				2,499				—
Cash and cash equivalents at end of year				$	54,088			$	2,515			$	2,499

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

None.

Item 9A.    Controls and Procedures

The company has carried out an evaluation, under the supervision and with the participation of the company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of disclosure controls and procedures pursuant to rules 13a-15 and 15-15d promulgated under the Securities and Exchange Act of 1934 as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures are effective to provide reasonable assurance that all material information relating to the company required to be filed in this report have been made known to them in a timely fashion. There have been no changes in internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to affect, internal control over financial reporting.

The company's management, including the Chief Executive Officer and the Chief Financial Officer, does not expect that the company's disclosure controls or its internal controls will prevent all errors and all fraud. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. As a result of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making are faulty, and that breakdowns can occur because of simple error or mistake. As a result of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Accordingly, the company's disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the disclosure controls and procedures are met.

Item 9B.    Other information

None. All items requiring disclosure in a report on Form 8-K during the fourth quarter of the year ended December 31, 2004, have been so reported.

Part III.

Item 10.    Directors and Executive Officers of the Registrant

Information regarding directors is set forth under "Election of Directors" in the company's Proxy Statement to be filed on or before April 30, 2005 ( the "Proxy Statement"), which is incorporated in this Item 10 by reference.

Information regarding executive officers is set forth under "Executive Officers," in the Proxy Statement, which is incorporated in this Item 10 by reference.

Information regarding Section 16(a) is set forth under "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement, which is incorporated in this Item 10 by reference.

The company has adopted a code of business conduct and ethics for all employees, including its Chief Executive Officer and Chief Financial Officer. A copy of such code of ethics can be found on the Company's website, at www.primusguaranty.com, free of charge. The Company would intend to satisfy the disclosure requirements regarding an amendment to, or waiver from, a provision of its code of ethics and that relates to a substantive amendment or material departure from a provision of the code by posting such information on its internet website at www.primusguaranty.com.

Item 11.    Executive Compensation

Information regarding compensation of the company's executive officers is set forth under "Executive Officer Compensation" and in the compensation tables in the Proxy Statement, which is incorporated in this Item 11 by reference.

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Primus Guaranty, Ltd.
Notes to Consolidated Financial Statements (Continued)
December 31, 2004

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Securities Authorized for Issuance under Equity Compensation Plans

The following table provides information as of December 31, 2004 with respect to compensation plans (including individual compensation agreements) approved by security holders and under which our equity securities are authorized for issuance.

Plan Category				Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (a)				Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b)				Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a) (c)
Equity compensation plans approved by security holders					1,428,003			$	10.28				4,537,673	(1)
Equity compensation plans not approved by security holders					401,250	(2)			—				—
Total					1,829,253			$	10.28				4,537,673

(1)	Represents 12% of total issued and outstanding common shares at December 31, 2004, less previously awarded securities.

(2)	Represents RSUs granted pursuant to individual compensation agreements, which vest over three years from date of grant and generally expire upon employment termination.

Additional information regarding security ownership of certain beneficial owners and management is set forth under "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement, which is incorporated in this Item 12 by reference.

Item 13.    Certain Relationships and Related Transactions

Information regarding relationships and related transactions is set forth under "Certain Relationships and Related Transactions" in the Proxy Statement, which is incorporated in this Item 13 by reference.

Item 14.    Principal Accounting Fees and Services

Information concerning principal accountant fees and services will be set forth under "Audit Committee Report-Fees of the Independent Auditors" in the Proxy Statement, which is incorporated in this Item 14 by reference.

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Part IV.

Item 15.    Exhibits and Financial Statement Schedules

(a) Financial Statements

The financial statements are set forth under Item 8 of this Annual Report on Form 10-K.

(b) Financial Statement Schedules

The following information is filed as part of this Annual Report on Form 10-K and should be read in conjunction with the financial statements contained in Item 8:

Report of Independent Registered Accounting Firm

All other schedules have been omitted because they were not applicable or because the required information has been included in the financial statements or notes thereto.

(c) Exhibits

Index to Exhibits

Number				Exhibit
	3.1			Memorandum of Association (Incorporated by reference to Exhibit 3.1 to the S-1 dated July 23, 2004)
	3.2			Bye-laws (Incorporated by reference to Exhibit 3.2 to the S-1/A dated June 10, 2004)
	4.1			Specimen Common Share Certificate (Incorporated by reference to Exhibit 4.1 to the S-1/A dated July 23, 2004)
	4.2			Warrant to purchase 11,317,972 common shares, par value $.01 per share, dated March 14, 2002, issued by the Registrant to XL Insurance (Bermuda) Ltd. (Incorporated by reference to Exhibit 4.2 to the S-1 dated April 26, 2004)
	10.1			Employment Agreement with Thomas W. Jasper, dated August 16, 2004 (Incorporated by reference to Exhibit 10.1 to the S-1 dated August 17, 2004)
	10.2			Employment Letter with Zachary Snow, dated April 26, 2002 (Incorporated by reference to Exhibit 10.2 to the S-1/A dated June 10, 2004)
	10.3			Employment Letter with Richard Claiden, dated October 20, 2003 (Incorporated by reference to Exhibit 10.3 to the S-1/A dated June 10, 2004)
	10.4			Form of Registration Rights Agreement by and among the Registrant and the signatories thereto (Incorporated by reference to Exhibit 10.4 to the S-1/A dated June 10, 2004)
	10.5			Primus Guaranty, Ltd. 2002 Stock Incentive Plan (Incorporated by reference to Exhibit 10.5 to the S-1 dated April 26, 2004)
	10.6			Primus Guaranty, Ltd. 2004 Stock Incentive Plan (Incorporated by reference to Exhibit 10.6 to the S-1/A dated July 23, 2004)
	10.7			Primus Guaranty, Ltd. Annual Performance Bonus Plan (Incorporated by reference to Exhibit 10.7 to the S-1 dated April 26, 2004)
	10.8			Primus Guaranty, Ltd. Severance Plan (Incorporated by reference to Exhibit 10.8 to the S-1/A dated June 10, 2004)
	10.9			Office Lease Agreement, dated July 25, 2002, between Madison 45 LLC and Primus Financial Products, LLC (Incorporated by reference to Exhibit 10.9 to the S-1 dated April 26, 2004)

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Number				Exhibit
	10.10			Credit Agreement, dated as of March 14, 2002, between Primus Financial Products, Inc. and Harris Trust and Savings Bank, as amended as of May 31, 2002, as further amended as of December 19, 2002, as further amended as of March 13, 2003, as further amended as of January 19, 2004 and as further amended as of March 12, 2004 (Incorporated by reference to Exhibit 10.10 to the S-1 dated April 26, 2004)
	10.11			Form of Indemnification Agreement between the Registrant and each of its directors and officers (Incorporated by reference to Exhibit 10.11 to the S-1/A dated June 10, 2004)
	10.12			Indemnification Agreement, dated September 22, 2004, between Primus Guaranty, Ltd. and XL Capital Ltd. (Incorporated by reference to Exhibit 10.12 to the S-1/A dated September 24, 2004)
	21			Subsidiaries of Primus Guaranty, Ltd.
	23.3			Consent of Ernst & Young LLP, Registered Public Accountants
	31.1			Rule 13a-14(a)/15d-14(a) Certification
	31.2			Rule 13a-14(a)/15d-14(a) Certification
	32.1			Certification Pursuant to 18 U.S.C. Section 1350, as Added By Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

PRIMUS GUARANTY, LTD. (Registrant)

By /s/ Thomas W. Jasper

Thomas W. Jasper Chief Executive Officer

Dated: March 21, 2005

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature		Title		Date
/s/ Thomas W. Jasper		Chief Executive Officer and Director (Principal Executive Officer)		March 21, 2005
Thomas W. Jasper
/s/ Richard Claiden		Chief Financial Officer (Principal Financial and Accounting Officer)		March 21, 2005
Richard Claiden
/s/ Michael P. Esposito, Jr.		Director and Chairman of the Board		March 21, 2005
Michael P. Esposito, Jr.
		Director
Frank P. Filipps
		Director
Duncan Goldie-Morrison
/s/ Thomas J. Hartlage		Director		March 21, 2005
Thomas J. Hartlage
/s/ James K. Hunt		Director		March 21, 2005
James K. Hunt
/s/ Robert R. Lusardi		Director		March 21, 2005
Robert R. Lusardi
/s/ Jay H. Shidler		Director		March 21, 2005
Jay H. Shidler
		Director
John Ward, III

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