PRS Prudential Financial Inc

Primus Guaranty, Ltd. (“Primus Guaranty” or “the Company”) (NYSE:PRS) today announced its financial results for the second quarter ended June 30, 2011.

• GAAP net income available to common shares for the second quarter 2011 was $61.1 million, or $1.62 per diluted share, compared with a GAAP net loss available to common shares of $188.4 million, or $4.84 per diluted share, for the second quarter 2010. GAAP net income available to common shares for the second quarter 2011 was driven by a net unrealized mark-to-market gain of $57.5 million on Primus Financial Products, LLC (“Primus Financial”)’s consolidated credit swap portfolio.
• Economic Results for the second quarter 2011 were $5.4 million, or $0.14 per diluted share, compared with an Economic Results of $6.8 million, or $0.18 per diluted share, for the second quarter 2010. Economic Results for the second quarter 2011 were primarily a result of premium revenue of $10.2 million, offset by net credit mitigation costs of $4.7 million and net operating costs of $3.3 million.
• Economic Results book value per common share was $7.76 at June 30, 2011, compared with Economic Results book value per common share of $7.31 at December 31, 2010.
• At June 30, 2011, the notional principal of Primus Financial’s consolidated credit swap portfolio totaled $9.3 billion.

Earnings

A copy of this press release and the financial supplement, including additional credit swap portfolio and historical data, is available in the Investor Relations section of the Company’s Web site at www.primusguaranty.com. Also available on the Web site is a letter dated August 9, 2011 to the shareholders from Richard Claiden, Chief Executive Officer.

Economic Results

In managing its business and assessing its profitability from a strategic and financial planning perspective, the Company believes it is appropriate to consider both its U.S. GAAP net income (loss) available to common shares as well as certain non-GAAP financial measures called “Economic Results”. We define Economic Results as GAAP net income (loss) available to common shares, adjusted as follows:

• Unrealized gains (losses) on credit swaps sold by Primus Financial are excluded from GAAP net income (loss) available to common shares;
• Realized gains from early termination of credit swaps sold by Primus Financial are excluded from GAAP net income (loss) available to common shares;
• Realized gains from early termination of credit swaps sold by Primus Financial are amortized over the period that would have been the remaining life of the credit swap. The amortized gain is included in Economic Results;
• A provision for credit default swaps on asset-backed securities (“CDS on ABS”) credit events is included in Economic Results; and
• A reduction in provision for CDS on ABS credit events upon termination of credit swaps is included in Economic Results.

The Company believes that quarterly fluctuations in the fair market value of Primus Financial’s consolidated credit swap portfolio have little or no effect on the Company's business operations and that Economic Results provides a useful, alternative view of the Company’s economic performance.

About Primus Guaranty

Primus Guaranty, Ltd. is a Bermuda company with offices in New York. Through its subsidiary, Primus Financial Products, LLC (“Primus Financial”), the Company provides protection against the risk of default on primarily investment grade corporate and sovereign reference entities.

Forward-Looking Statements

Some of the statements included in this press release and other statements Primus Guaranty may make, particularly those anticipating future financial performance, business prospects, growth and operating strategies, market performance, valuations and similar matters, are forward-looking statements that involve a number of assumptions, risks and uncertainties, which change over time. Any such statements speak only as of the date they are made, and Primus Guaranty assumes no duty to, and does not undertake to, update any forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements, and future results could differ materially from historical performance. For a discussion of the factors that could affect the Company's actual results please refer to the risk factors identified from time to time in the Company's SEC reports, including, but not limited to, Primus Guaranty's Annual Report on Form 10-K, as filed with the U.S. Securities and Exchange Commission.

            Primus Guaranty, Ltd. Condensed Consolidated Statements of Financial Condition (Unaudited)

(in thousands except share amounts)

  June 30, December 31, 2011 2010   Assets Cash and cash equivalents $ 115,516 $ 177,736 Investments (includes $335,856 and $288,815 at fair value as of June 30, 2011 and December 31, 2010, respectively) 336,027 288,985 Restricted cash and investments 135,080 138,540 Accrued interest and premiums 5,632 5,860 Unrealized gain on credit swaps, at fair value 2,396 2,006 Debt issuance costs, net 3,865 4,072 Other assets (includes $9,605 and $11,559 at fair value as of June 30, 2011 and December 31, 2010, respectively)   12,840   17,660 Total assets $ 611,356 $ 634,859   Liabilities and Equity Liabilities Accounts payable and accrued expenses $ 4,401 $ 8,701 Unrealized loss on credit swaps, at fair value 255,364 395,164 Payable for credit events 2,531 3,447 Long-term debt 202,688 215,828 Restructuring liabilities 61 3,729 Other liabilities   3,440   6,025 Total liabilities   468,485   632,894     Equity (deficit) Common shares, $0.08 par value, 62,500,000 shares authorized, 37,239,493 and 38,078,790 shares issued and

outstanding at June 30, 2011 and December 31, 2010, respectively

2,978 3,046 Additional paid-in capital 272,069 275,453 Accumulated other comprehensive income 4,810 3,333 Retained earnings (deficit)   (227,132)   (372,969) Total shareholders’ equity (deficit) of Primus Guaranty, Ltd 52,725 (91,137) Preferred securities of subsidiary   90,146   93,102 Total equity   142,871   1,965 Total liabilities and equity $ 611,356 $ 634,859             Primus Guaranty, Ltd. Condensed Consolidated Statements of Operations (Unaudited)

(in thousands except per share amounts)

  Three Months Ended

June 30,

Six Months Ended

June 30,

2011       2010 2011       2010   Revenues Net credit swap revenue (loss) $ 61,009 $ (189,708) $ 147,107 $ (102,178) Interest income 2,569 3,541 5,180 6,240 Gain on retirement of long-term debt - 2,676 2,760 7,433 Other income (loss)   321   (51)   618   132 Total revenues   63,899   (183,542)   155,665   (88,373)   Expenses Compensation and employee benefits 1,570 4,546 3,692 9,126 Professional and legal fees 674 2,178 1,496 3,663 Interest expense 1,546 1,737 3,113 3,606 Other   1,077   1,777   2,393   3,500 Total expenses   4,867   10,238   10,694   19,895 Income (loss) from continuing operations before provision (benefit) for income taxes 59,032 (193,780) 144,971 (108,268) Provision (benefit) for income taxes   1   (113)   11   27 Income (loss) from continuing operations, net of tax 59,031 (193,667) 144,960 (108,295) Income (loss) from discontinued operations, net of tax   2,808   (119,937)   2,538   (28,386) Net income (loss) 61,839 (313,604) 147,498 (136,681) Less: Distributions on preferred securities of subsidiary 702 724 1,661 1,712 Net loss from discontinued operations attributable to non-parent interests in CLOs   -   (125,934)   -   (36,521) Net income (loss) available to common shares $ 61,137 $ (188,394) $ 145,837 $ (101,872)   Income (loss) per common share: Basic: Income (loss) from continuing operations $ 1.55 $ (5.00) $ 3.78 $ (2.84) Income (loss) from discontinued operations $ 0.08 $ 0.16 $ 0.07 $ 0.21 Net income (loss) available to common shares $ 1.63 $ (4.84) $ 3.85 $ (2.63) Diluted: Income (loss) from continuing operations $ 1.55 $ (5.00) $ 3.76 $ (2.84) Income (loss) from discontinued operations $ 0.07 $ 0.16 $ 0.07 $ 0.21 Net income (loss) available to common shares $ 1.62 $ (4.84) $ 3.83 $ (2.63)   Weighted average common shares outstanding: Basic 37,638 38,903 37,881 38,795 Diluted 37,837 38,903 38,124 38,795  

Primus Guaranty, Ltd.

Regulation G and Other Disclosure

Economic Results

June 30, 2011

(Unaudited)

 

In managing its business and assessing its profitability from a strategic and financial planning perspective, the Company believes it is appropriate to consider both its U.S. GAAP net income (loss) available to common shares as well as certain non-GAAP financial measures called “Economic Results”. We define Economic Results as GAAP net income (loss) available to common shares, adjusted as follows:

   

•

 

Unrealized gains (losses) on credit swaps sold by Primus Financial are excluded from GAAP net income (loss) available to common shares;

•

Realized gains from early termination of credit swaps sold by Primus Financial are excluded from GAAP net income (loss) available to common shares;

•

Realized gains from early termination of credit swaps sold by Primus Financial are amortized over the period that would have been the remaining life of the credit swap. The amortized gain is included in Economic Results;

•

A provision for CDS on ABS credit events is included in Economic Results; and

•

A reduction in provision for CDS on ABS credit events upon termination of credit swaps is included in Economic Results.

The Company believes that quarterly fluctuations in the fair market value of Primus Financial’s consolidated credit swap portfolio have little or no effect on the Company's business operations and that Economic Results provides a useful, alternative view of the Company’s economic performance.

                                  Economic Results per GAAP Diluted Share                                                         (in 000's except per share amounts) Three Months Ended Six Months Ended June 30, June 30, 2011 2010 2011 2010 GAAP Net income (loss) available to common shares $ 61,137 $ (188,394 ) $ 145,837 $ (101,872 ) Adjustments: Change in unrealized fair value of credit swaps sold (gain) loss by Primus Financial (57,452 ) 194,963 (140,190 ) 67,827 Amortization of realized gains from the early termination of credit swaps sold by Primus Financial 30 264 69 558 Provision for CDS on ABS credit events (255 ) - (1,398 ) (2,374 ) Reduction in provision for CDS on ABS credit events upon termination of credit swaps         1,983           -     9,841           1,819   Economic Results       $ 5,443         $ 6,833   $ 14,159         $ (34,042 )   Economic Results earnings (loss) per GAAP diluted share $ 0.14 $ 0.18 $ 0.37 $ (0.88 )

 

Economic Results weighted average common shares - GAAP diluted

37,837 38,903 38,124 38,795                                   Economic Results Book Value per Share                                   June 30, December 31, 2011 2010   GAAP Shareholders' equity (deficit) of Primus Guaranty, Ltd. $ 52,725 $ (91,137 ) Adjustments:   Accumulated other comprehensive (income) loss (4,810 ) (3,333 ) Unrealized fair value of credit swaps sold (gain) loss by Primus Financial 252,968 393,158 Realized gains from early termination of credit swaps sold by Primus Financial (33,574 ) (33,574 ) Amortized realized gains from the early termination of credit swaps sold by Primus Financial 33,512 33,443 Provision for CDS on ABS credit events (70,189 ) (68,791 ) Reduction in provision for CDS on ABS credit events upon termination of credit swaps         58,416           48,575   Economic Results Shareholders' Equity       $ 289,048         $ 278,341     Economic Results book value per share issued and outstanding $ 7.76 $ 7.31   GAAP book value per share issued and outstanding $ 1.42 $ (2.39 )   Common shares issued and outstanding 37,239 38,079                           Primus Guaranty, Ltd. GAAP Net Credit Swap Revenue (Loss) June 30, 2011 (Unaudited)                                       GAAP Net Credit Swap Revenue (Loss)                                   (in 000's) Three Months Ended

June 30,

Six Months Ended

June 30,

2011 2010 2011 2010 Net credit swap revenue (loss) components Credit swaps sold - single name (Primus Financial) Net premium income $ 6,677 $ 11,626 $ 14,257 $ 24,192 Realized gains - - - Realized losses (652 ) (7,073 ) (652 ) (26,296 ) Change in unrealized gains/(losses) 24,504 (34,506 ) 42,059 1,544 Credit swaps sold - tranches (Primus Financial) Net premium income 3,526 3,583 7,055 7,386 Realized gains - - - Realized losses (4,032 ) - (4,032 ) (35,000 ) Change in unrealized gains/(losses) 30,701 (164,691 ) 88,819 (75,293 ) Credit swaps undertaken to offset credit risk (Primus Financial) Net premium income (expense) - (45 ) - (45 ) Net realized gains (losses) - (2,938 ) 47 (2,938 ) Change in unrealized gains/(losses) - 3,236 (59 ) 2,937 Credit swaps sold - ABS (Primus Financial) Net premium income 21 66 83 133 Realized gains - - - - Realized losses (1,983 ) - (9,841 ) (1,819 ) Change in unrealized gains/(losses) 2,247 998 9,371 2,985 Net credit swaps (PARC fund)   -     36     -     36   Net credit swap revenue (loss) $ 61,009   $ (189,708 ) $ 147,107   $ (102,178 )