S-1 1 file001.htm FORM S-1

As filed with the Securities and Exchange Commission on April 23, 2004.

Registration No. 333-          

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM S-1

REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933

PRIMUS GUARANTY, LTD.

(Exact name of registrant as specified in its charter)


Bermuda 6199 N/A
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. employer
Identification Number)

Primus Guaranty, Ltd.
Clarendon House, 2 Church Street
Hamilton HM 11, Bermuda
441-296-0519

(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)

Zachary Snow, Esq.
Primus Asset Management, Inc.
360 Madison Avenue, 23rd Floor
New York, New York 10017
212-697-2227
Fax: 212-697-3731

(Name, address, including zip code, and telephone number, including area code, of agent for service)

copies to:


Stephen P. Farrell, Esq. Richard A Drucker, Esq.
Morgan, Lewis & Bockius LLP Davis Polk & Wardwell
101 Park Avenue 450 Lexington Avenue
New York, New York 10178 New York, New York 10017
212-309-6000 212-450-4000
Fax: 212-309-6001 Fax: 212-450-3800

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 (the Securities Act), check the following box: [ ]

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ]

Calculation of Registration Fee


Title of Each Class of Securities to be registered Proposed Maximum
Aggregate Offering Price(1)(2)
Amount of
Registration Fee
Common Shares, par value $0.01 per share $ 172,500,000   $ 21,856.00  
(1) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act.
(2) Includes shares subject to the underwriters' over-allotment option.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.




The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to Completion, dated April 23, 2004

PROSPECTUS

                                Shares

Primus Guaranty, Ltd.

Common Shares

This is our initial public offering of common shares. We are offering                   common shares and the selling shareholders identified in this prospectus are offering                    common shares. No public market currently exists for our common shares. We will not receive any proceeds from the sale of the common shares offered by the selling shareholders.

We have applied to have our common shares listed on the New York Stock Exchange under the symbol "PRS". We currently estimate that the initial public offering price will be between $     and $     per share.

Investing in the shares involves risks. Risk Factors begin on page 7.


  Per Share Total
Public offering price $                  $                 
Underwriting discount $   $  
Proceeds to Primus Guaranty, Ltd. (before expenses) $   $  
Proceeds to selling shareholders (before expenses) $   $  

The selling shareholders have granted the underwriters a 30-day option to purchase up to an aggregate of                    additional common shares on the same terms and conditions as set forth above to cover over-allotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

Lehman Brothers, on behalf of the underwriters, expects to deliver the shares on or about                        , 2004.

LEHMAN BROTHERS MORGAN STANLEY

CREDIT SUISSE FIRST BOSTON

                    , 2004




TABLE OF CONTENTS

    


  Page
Prospectus Summary   1  
Risk Factors   7  
Special Note Regarding Forward-Looking Statements   17  
Use Of Proceeds   18  
Dividend Policy   18  
Capitalization   19  
Dilution   20  
Selected Historical Consolidated Financial Data   21  
Management's Discussion and Analysis of Financial Condition and Results of Operations   24  
Industry Overview   34  
Business   38  
Management   49  
Principal and Selling Shareholders   59  
Certain Relationships and Related Transactions   61  
Description of Share Capital   63  
Shares Eligible for Future Sale   74  
Tax Considerations   76  
Underwriting   84  
Legal Matters   90  
Experts   90  
Where You Can Find Additional Information   90  
Index to Consolidated Financial Statements   F-1  

ABOUT THIS PROSPECTUS

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or insufficient information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date.

Through and including                      , 2004 (the 25th day after the date of this prospectus), all dealers effecting transactions in our common shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligations to deliver a prospectus when acting as underwriters and with respect to their unsold allotment or subscriptions.

We use market data and industry forecasts and projections throughout this prospectus, which we have obtained from market research, publicly available information and industry publications. These sources generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of the information are not guaranteed. The forecasts and projections are based on industry surveys and the preparers' experience in the industry and there is no assurance that any of the projected amounts will be achieved. Similarly, we believe that the surveys and market research others have performed are reliable, but we have not independently verified this information.

This prospectus refers to brand names, trademarks, service marks and trade names of other companies and organizations, and these brand names, trademarks, service marks and trade names are the property of their respective holders.

Common shares may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act of 2003 of Bermuda, as amended, or Investment Business Act, which regulates the sale of securities in Bermuda. In addition, the Bermuda Monetary Authority, or BMA, must approve all issuances and transfers of shares of a Bermuda exempted company. Prior to the consummation of this offering, we expect the BMA will have issued its permission for the issue and free transferability of the common shares being offered pursuant to this prospectus, as long as the shares of Primus Guaranty, Ltd. are listed on an appointed stock exchange (including the New York Stock Exchange, or NYSE), to and among persons who are non-residents of Bermuda for exchange control purposes. In addition, we will deliver to and file a copy of this prospectus with the Registrar of Companies in Bermuda in accordance with Bermuda law. The BMA and the Registrar of Companies

i




accept no responsibility for the financial soundness of any proposal or for the correctness of any of the statements made or opinions expressed in this prospectus.

Unless otherwise indicated or the context requires otherwise, in this prospectus:

•  references to "the company," "we," "us" and "our" are to Primus Guaranty, Ltd. and its
combined operations;
•  references to "Primus Guaranty" refer solely to Primus Guaranty, Ltd.;
•  references to "Primus Financial" refer solely to Primus Financial Products, LLC;
•  references to "Primus Re" refer solely to Primus Re, Ltd.;
•  references to "Primus Asset Management" refer solely to Primus Asset Management, Inc.;
•  references to "Primus Barbados" refer solely to Primus (Barbados), Ltd.;
•  references to "Primus Group Holdings" refer solely to Primus Group Holdings, LLC; and
•  the information in this prospectus assumes that the underwriters have not exercised their over-allotment option.

ii




PROSPECTUS SUMMARY

This summary does not contain all of the information that you should consider before investing in our common shares. You should read the entire prospectus carefully, including the "Risk Factors" section beginning on page 7 and our consolidated financial statements and related notes to these financial statements beginning on page F-1 before making an investment decision.

Our Company

Overview

Our principal business is selling credit protection under which we assume the risk of default on investment grade credit obligations. The protection we sell takes the form of a credit default swap, or credit swap. In exchange for a fixed quarterly premium we agree, upon a default or other credit event affecting a designated issuer, or Reference Entity, to pay a counterparty an agreed amount, or notional amount, against delivery of the Reference Entity's debt obligation. Credit swaps are an efficient and standardized mechanism to reduce credit risk exposure arising from the ownership of financial obligations such as bonds, loans and receivables. The primary purchasers of credit swaps are commercial and investment banks as well as credit portfolio managers, insurance companies and other financial institutions.

Primus Financial, our principal subsidiary, has the highest counterparty credit ratings offered by Standard & Poor's Rating Services (AAA), or S&P, and Moody's Investors Service, Inc. (Aaa), or Moody's, and is managed by an experienced team of professionals who have expertise in credit analysis, trading, risk management and market analysis. At December 31, 2003, we had relationships with 31 counterparties to which we were prepared to sell credit default protection. At December 31, 2003, Primus Financial had issued credit protection with respect to $6.3 billion (in notional amount) of referenced obligations representing 350 Reference Entities spread across 37 industries and 22 countries. The credit swaps in our portfolio had a weighted average credit rating of A ("strong"; sixth of 18 categories) by S&P and A2 ("good financial security"; sixth of 21 categories) by Moody's and had an average maturity of 2.7 years at December 31, 2003.

Generally, the credit swaps we sell provide for the quarterly payment of premiums to us over a term of one or more years and cannot be terminated prior to maturity except by mutual agreement. Our counterparties generally have investment grade credit ratings. Historically, credit swap premiums have significantly exceeded the losses experienced in investment grade debt obligations covered by such credit swaps.

We were capitalized in March 2002 and sold our first credit swaps in June 2002.

Growth In The Credit Swap Market

The credit swap market has been transformed from a small, niche segment of the capital markets to a global market that is rapidly growing with diverse product applications and a wide range of participants. The notional amount referenced by outstanding credit swaps is estimated by the British Bankers Association, a third-party research firm, and the International Swaps and Derivatives Association, Inc., or ISDA, to have grown from $180.0 billion at December 31, 1997, to $3.6 trillion at December 31, 2003, representing a compound annual growth rate of 65%. There are approximately 1,300 Reference Entities that have investment grade credit ratings by both S&P and Moody's. We believe that the credit swap market will continue to grow as commercial and investment banks and other credit portfolio managers more actively manage their credit and investment portfolios.

Competitive Strengths

We believe we are well-positioned to continue to compete effectively in the credit swap market. The following are our competitive strengths:

1




Highest Available Counterparty Credit Ratings.    Primus Financial has a AAA ("extremely strong") counterparty credit rating from S&P and a Aaa ("exceptional") counterparty credit rating from Moody's, the highest of their eighteen and twenty-one rating levels, respectively. We believe that the financial strength of a counterparty is an important consideration for buyers of credit swaps. Primus Financial's ratings are a competitive advantage that afford it access to a broader universe of potential counterparties and a greater capacity to incur credit risk than would be the case with lower counterparty credit ratings. Our financial strength also allows us to finance our operations at a relatively low cost. At December 31, 2003, Primus Financial had total capital resources of $241.1 million.

Experienced Management Team with Strong Market Relationships.    Our management team has extensive industry experience with strong and long-standing market relationships with participants and counterparties in the credit swap market, which have allowed us to become widely accepted as a professional credit swap investor and counterparty. We believe these relationships will allow us to continue to grow our business and expand our presence in the credit markets.

Disciplined Underwriting and Risk Management.    We underwrite credit risks using a rigorous credit analysis that allows us to sell credit default protection on Reference Entities that we believe offer attractive risk-adjusted returns. Primus Financial's experienced credit staff manages the underwriting process and monitors the on-going risk profile of our portfolio. Our underwriting process has allowed us to create a portfolio of Reference Entities whose quality and diversity are designed to mitigate our exposure to losses. We actively monitor fundamental credit information and market indicators regarding these Reference Entities and take action to limit or remove our exposure to a Reference Entity when we believe its risk of default exceeds acceptable levels.

Efficient and Scalable Operations.    We believe we have created customized, efficient and scalable operations which enable us to leverage our management's expertise and provide opportunities to realize increased profitability as our business grows and matures.

Business Strategy

The major elements of our strategy are:

Continue to Expand our Credit Swap Business.    We intend to leverage our competitive strengths to:

•  continue to build a diversified credit risk portfolio;
•  sell credit swaps referencing portfolios containing obligations of multiple Reference Entities;
•  expand the number and depth of our counterparty relationships;
•  actively manage the credit risk in our portfolio; and
•  increase and efficiently utilize our capital resources to support our growth.

Maintain Primus Financial's AAA/Aaa Ratings.    Primus Financial's AAA/Aaa credit ratings are central components of our business strategy. We believe that having the highest ratings from S&P and Moody's gives Primus Financial the ability to attract large and growing amounts of business with a wide range of counterparties and the ability to select Reference Entities along the full spectrum of investment grade credits.

Pursue Opportunities in Complementary Businesses.    We intend to diversify our sources of revenue by expanding into complementary businesses. These businesses may include managing third parties' credit swap portfolios and pursuing additional opportunities in the credit swap market, such as selling credit swaps referencing a broader range of obligations, including obligations that are below investment grade. As we continue to increase the breadth and volume of our services, we plan to selectively add personnel to support our activities. We will evaluate opportunities to make strategic acquisitions to accelerate our entry into related businesses.

2




Corporate Structure

We are a Bermuda company. Primus Financial is our principal subsidiary and a AAA/Aaa rated seller of credit swaps. Primus Asset Management, another of our subsidiaries, manages Primus Financial's credit swap business and intends to manage the credit swap portfolios of third parties. We also have a Bermuda registered financial guaranty insurance company, Primus Re, that offers credit insurance protection to companies that prefer insurance products to credit swaps. We are currently owned primarily by XL Insurance (Bermuda) Ltd, a subsidiary of XL Capital Ltd, Transamerica Life Insurance Company, a subsidiary of AEGON USA, Pacific Corporate Group/CalPERS, Radian Group Inc. and our management. Our institutional shareholders have nominated individuals to serve on our board of directors and these directors provide us valuable assistance and expertise in conducting and expanding our business.

Our registered office is at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda and our telephone number is 441-296-0519. The offices of our principal operating subsidiary, Primus Financial, are located at 360 Madison Avenue, 23rd Floor, New York, New York 10017 and its telephone number is 212-697-2227.

Notice to United States Investors—Tax Consequences of Owning Our Shares

We and our subsidiary, Primus Barbados, are likely to be and remain passive foreign investment companies, or PFICs, for United States federal income tax purposes. There are potentially adverse United States federal income tax consequences of investing in a PFIC for a shareholder who is a United States taxpayer. These consequences include the following:

•  if a shareholder makes a qualified electing fund election, or QEF election, with respect to Primus Guaranty and Primus Barbados, the shareholder will have to include annually in his or her taxable income an amount reflecting an allocable share of the income of Primus Guaranty or Primus Barbados, regardless of whether dividends are paid by Primus Guaranty to the shareholder;
•  if a shareholder makes a mark-to-market election with respect to Primus Guaranty, the shareholder will have to include annually in his or her taxable income an amount reflecting any year-end increases in the price of our common shares, regardless of whether dividends are paid by Primus Guaranty to the shareholder; it is unclear how such an election would affect the shareholder with respect to Primus Barbados; and
•  if a shareholder does not make a QEF election or a mark-to-market election, he or she may incur significant additional United States federal income taxes with respect to dividends on, or gain from, the sale or other disposition of, our shares, or with respect to dividends from Primus Barbados to us, or with respect to our gain on any sale or other disposition of Primus Barbados shares.

Please review carefully "Risk Factors—Risks Related to Taxation" and "Tax Considerations—Taxation of Shareholders—United States Holders—Passive Foreign Investment Companies".

United States holders of common shares are urged to consult with their tax advisors as to the tax consequences of holding shares directly and indirectly (in the case of Primus Barbados) of PFICs and the possible advisability of electing to have each of Primus Guaranty and Primus Barbados treated as a "qualified electing fund", or QEF, or of making a mark-to-market election with respect to Primus Guaranty.

3




The Offering

Common shares offered by Primus     Guaranty                shares
Common shares offered by Selling     Shareholders                shares
Common shares to be outstanding after     this offering                shares
Use of proceeds We intend to use a portion of the net proceeds from this offering to provide up to $60.0 million in additional capital to Primus Financial to expand its capacity to enter into credit swaps and to use the remainder as working capital and for general corporate purposes, including expanding our credit swap business and pursuing opportunities in complementary businesses. We will not receive any of the proceeds from the sale of shares by the selling shareholders.
Dividend policy We do not intend to pay dividends on our common shares for the foreseeable future. We plan to retain our earnings for use in the operation of our business and to fund future growth.
Proposed New York Stock Exchange     symbol "PRS"

Except as otherwise indicated, the number of common shares stated to be outstanding after this offering gives effect to the common shares being sold by us in this offering, a                              for                          reverse share split that we intend to effect immediately prior to the completion of this offering and the automatic conversion of all outstanding shares of our convertible preferred shares into an aggregate of                 common shares upon completion of this offering. Such number of common shares excludes:

•              common shares issuable upon exercise of options outstanding as of December 31, 2003, under our employee incentive plan, with a weighted average exercise price of $         per share;
•              common shares issuable upon exercise of warrants outstanding as of December 31, 2003, with an exercise price of $         per share and an expiration date of March 14, 2007; and
•              additional common shares reserved for issuance under our employee incentive plans.

Unless otherwise indicated, all information in this prospectus assumes that the underwriters will not exercise the over-allotment option granted by the selling shareholders to purchase up to additional common shares in this offering.

You should read the discussion under "Management—Share Option and Other Benefit Plans" for additional information about our employee option plan.

4




Summary Historical Financial Data

The following tables summarize our historical financial and operating data as of the dates or for the periods indicated. We derived the summary for each of the three years ended December 31, 2003, 2002 and 2001 and the consolidated balance sheet data as of December 31, 2003 from our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or United States GAAP, and audited by Ernst & Young LLP. The results of operations for prior accounting periods are not necessarily indicative of the results to be expected for any future accounting periods. Until March 2002, we were in a development stage. We capitalized Primus Financial on March 14, 2002 and began to sell credit swaps in June 2002. You should read this summary in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes appearing elsewhere in this prospectus.


  Year Ended December 31,
($ in thousands, except per share data) 2003 2002 2001
Statement of Operations:                  
Revenues:                  
Net premiums earned $ 38,516   $ 11,768   $  
Net realized gains on credit swaps   17,629     2,843      
Net unrealized gains (losses) on credit swaps   46,739     (213    
Interest income earned   2,617     1,610     2  
Other income   107     12      
Total revenues $ 105,608   $ 16,020   $ 2  
Expenses:                  
Employee compensation $ 11,701   $ 6,428   $  
Other expenses   13,754     8,115      
Development stage expenses       4,292     2,789  
Total expenses $ 25,455   $ 18,835   $ 2,789  
Income (loss) before benefit (provision) for income taxes   78,299     (2,815   (2,787
Net income (loss)   78,471     (3,069   (2,787
                   
Other Financial Data (unaudited):                  
Core Earnings (losses)(1)   16,313     (1,657    
                   
Per Share Data:                  
Earnings (loss) per share:                  
Basic(2) $ 3.90   $ (0.15 $ (0.14
Diluted(2)(3) $ 0.29   $ (0.15 $ (0.14
Weighted average number of common shares outstanding:                  
Basic   20,135     20,083     19,828  
Diluted   269,638     20,083     19,828  

5





  As of December 31, 2003
($ in thousands, except per share data) Actual As Adjusted(4)
Balance Sheet Data:   (unaudited)
Cash and cash equivalents $ 257,967   $                
Short-term investments   3,968        
Unrealized gain on credit swaps, at fair value   46,594        
Total assets   321,429        
Unrealized loss on credit swaps, at fair value   68        
Total liabilities   8,070        
Shareholders' equity   214,838        
Total liabilities, preferred securities of subsidiary and shareholders' equity   321,429        
(1) In addition to United States GAAP net income, we use an additional performance measure, which we refer to as "Core Earnings." We believe this adjusted measure provides management and shareholders with a tool that assists in the long-term evaluation of our performance in a manner consistent with our primary business strategy, which is generally to sell credit swaps and hold them to maturity. Although we generally hold the credit swaps we sell until maturity, we are required under United States GAAP to carry our credit swap portfolio at fair value, which produces significant changes in our net income as the market values of our credit swaps fluctuate. Because we are required under United States GAAP to carry our credit swaps at fair value, we are not permitted to record a reserve for anticipated losses due to credit events. The computation of Core Earnings does not recognize gains or losses based on marking to market our portfolio of credit swaps that we had sold or purchased. Additionally, unlike United States GAAP net income, Core Earnings does not immediately recognize realized gains related to unwinds or assignments of credit swaps sold prior to maturity. To compute Core Earnings, we amortize any such gains over the remaining original lives of the contracts that were terminated or assigned. We include realized losses on such terminations and assignments in Core Earnings immediately. Non-recurring development stage expenses are excluded from the calculation of Core Earnings.

  Year Ended December 31,
($ in thousands) 2003 2002
Net United States GAAP income (loss) $ 78,471   $ (3,069
Add development stage expenses       4,292  
Add (less) change in fair value on credit swaps sold   (46,739   213  
Less realized gains on terminated credit swaps sold   (18,313   (3,146
Add amortization of gains on the
unwind or assignment of credit swaps sold
  2,893     53  
Core earnings (losses) $ 16,312   $ (1,657
(2) Share amounts and strike prices will be adjusted to reflect a reverse share split we expect to effect prior to the completion of this offering.
(3) Includes conversion of Series A preferred shares immediately prior to the consummation of this offering.
(4) As adjusted to give effect to the sale of a total of              common shares in this offering at an assumed public offering price of $          per share, the midpoint of the range set forth on the cover of the prospectus.

6




RISK FACTORS

Your investment in our common shares will involve some risks. You should carefully consider the following discussion of these risks, together with the other information contained in this prospectus, before deciding whether an investment in our common shares is suitable for you.

The risks and uncertainties described in this prospectus are not the only risks we face. However, these are the risks our management believes are material. Additional risks not presently known to us or that we currently deem immaterial may also impair our business or results of operations. Any of the risks described below could have a significant or material adverse effect on our results of operations or financial condition, and a corresponding decline in the market price of our common shares.

Risks Related to our Business

The failure to manage effectively the risk of credit losses could have a material adverse effect on our financial condition, results of operations and credit ratings.

We cannot assure you that any of the loss mitigation methods we use in managing our credit swap portfolio will be effective. If, for example, multiple credit defaults or other credit events that exceed our expectations occur within a short time period, the payments we would be required to make under the related credit swaps could materially and adversely affect our financial condition, results of operations and credit ratings. Moreover, even though we may identify a heightened risk of default with respect to a particular Reference Entity, our ability to limit our losses, such as through hedging or terminating the credit swap, before a default or other credit event actually occurs could be limited by inadequate liquidity in the credit swap market. We also intend to enter into new businesses, including selling credit swaps referencing obligations of Reference Entities that are below investment grade, which may not have the same or similar loss limitation methods. There can be no assurance that we will be able to effectively manage higher risks of credit losses or that any of our existing loss mitigation methods will be effective in any of these new businesses.

Primus Financial's operating guidelines and S&P's and Moody's capital requirements are subject to change and may limit our growth. Additionally, a decline in our current counterparty credit ratings from S&P and Moody's would likely have a material adverse impact on our business and cause our revenues and earnings to decrease.

In order to obtain and maintain its counterparty credit ratings, Primus Financial has adopted operating guidelines, the terms of which have been agreed upon with S&P and Moody's. We cannot assure you that S&P and Moody's will not require changes to Primus Financial's operating guidelines or that, if such changes are made, Primus Financial will be able to comply with them. For example, if S&P and Moody's were to require Primus Financial to maintain additional capital to retain its AAA/Aaa ratings, we cannot be certain that we could raise additional capital when needed. Moreover, if Primus Financial suffers losses to such an extent that it is not in compliance with the capital criteria of its operating guidelines and it is not able to cure the capital deficiency in a timely manner, its operating guidelines require it to cease entering into new credit swaps (except for limited hedging transactions, as described in the operating guidelines). If the foregoing occur, S&P and Moody's could reduce or withdraw their AAA/Aaa credit ratings of Primus Financial which, in turn, would likely have a material adverse effect on our business and our financial performance.

We are dependent on counterparties' perception of our creditworthiness.

In establishing relationships, Primus Financial's counterparties generally analyze its financial condition prior to entering into a credit swap, establish credit limits, and monitor the appropriateness of these limits on an ongoing basis to limit the risk that it will be financially unable to make payments in accordance with the credit swap. Once a counterparty reaches its credit exposure limit to Primus Financial, the counterparty will not enter into any additional transactions with Primus Financial until the counterparty credit limit is increased. In the event these counterparty credit limits are not

7




increased as Primus Financial's portfolio expands or if limits are reduced, our financial performance would suffer. In addition, while there are buyers of credit swaps, such as our existing counterparties, that do not require us to post collateral, there are some buyers, including some of the leading participants in the credit swap market, that require even the highest rated counterparties from which they purchase credit swaps to post collateral. If our existing counterparties were to require us to post collateral, it may have a material adverse effect on us and our financial condition and restrict our growth.

We depend on a limited number of key executives.

The loss of any of our key personnel, including the individuals listed in the "Management" section of this prospectus, many of whom have long-standing relationships with our counterparties, could have a material adverse effect on us. As our business develops and expands, we believe that our success will depend greatly on our continued ability to attract and retain highly skilled and qualified personnel. We cannot assure you that we will continue to be able to employ key personnel or that we will be able to attract and retain qualified personnel in the future. We do not have "key person" life insurance to cover our executive officers. Failure to retain or attract key personnel could have a material adverse effect on us.

We have a limited operating history, and our future performance is uncertain.

We and our subsidiaries are relatively new companies with limited operating histories. As a result, there is limited historical financial and operating information available to help you evaluate our past performance or to make a decision about an investment in our common shares. Companies in their initial stages of development present substantial business and financial risks and may suffer significant losses. New companies must successfully develop business relationships, establish operating procedures, hire staff, install management information and other systems, establish facilities and obtain licenses, as well as take other steps necessary to conduct their intended business activities. As a result of these risks, it is possible that we may not be successful in implementing our business strategy or in completing the development of the infrastructure necessary to run our business. In addition, because of our limited operating history, our historical financial results may not accurately predict our future performance. As a result of industry factors or factors specific to us, we may have to alter our anticipated methods of conducting our business, such as the nature, amount and types of risks we assume.

Our financial results depend on certain market conditions and growth in the credit swap market which are not within our control.

Our financial results depend to a significant degree upon the premiums that we receive on our credit swaps. Historically, these premiums have been a function of credit spreads that change over time as a result of a variety of factors which we do not control, including changes in the overall economy, supply and demand conditions in the credit swap market and other factors affecting the corporate credit markets in general. If a low credit swap premium environment develops and persists, we may not be able to achieve profitable growth, which may have a material adverse effect on our financial condition and our results of operations. In addition, there can be no assurance that the credit swap market will continue to grow as it has historically or at all or that it will not decline. Any such decline could have a material adverse effect on our business and financial condition and restrict our growth.

Variations in credit swap premiums could cause our earnings to be inconsistent and our stock price to fluctuate significantly.

Any event causing credit swap premiums to widen or tighten on an underlying Reference Entity in our portfolio will affect the fair value of related credit swaps, and may increase the volatility of our earnings and, in turn, our share price. Common events that may cause credit swap premiums to fluctuate include changes in national or regional economic conditions, industry cyclicality, credit events

8




within an industry, changes in a Reference Entity's operating results, credit rating, cost of funds, management or any other factors leading investors to revise expectations about a Reference Entity's ability to pay principal and interest on its debt obligations when due. Changes in fair value of our credit swaps are recorded as unrealized gains or losses in our consolidated income statement. In 2003, a decline in premium levels caused an increase in the fair value of our credit swap portfolio which resulted in net unrealized gain of $46.7 million, or 44.2% of our consolidated revenues for the year ended December 31, 2003. Wide fluctuations in the premium levels may have a material effect on our reported results of operations.

We may require additional capital in the future which may not be available on favorable terms or at all.

If we require additional capital, we may need to raise additional funds through financings or curtail our growth and reduce our assets. Any equity or debt financing, if available at all, may be on terms that are not favorable to us. In the case of equity financings, dilution to our shareholders could result, and in any case such securities may have rights, preferences and privileges that are senior to those of the common shares offered hereby. If we cannot obtain adequate capital, our business, results of operations and financial condition could be adversely affected.

Certain of our existing shareholders control us and will continue to control us after this offering. The commercial and investment activities of such shareholders may present conflicts with our interests in the future.

After the offering, our existing shareholders will own more than a majority of our common shares, even if the underwriters exercise their over-allotment option in full. As a result, these existing shareholders will continue, collectively, to be able to control the election of our directors, determine our corporate and management policies and determine, without the consent of our other shareholders, the outcome of any corporate action submitted to our shareholders for approval, including potential mergers, amalgamations or acquisitions, asset sales and other significant corporate transactions. These existing shareholders will also have sufficient voting power to amend our organizational documents. We cannot assure you that the interests of our existing shareholders will coincide with the interests of other holders of our common shares. This concentration of ownership may also discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their common shares as part of a sale of our company and might reduce our share price.

Additionally, certain of our existing shareholders engage in commercial activities and enter into transactions or agreements with us or in competition with us, which may give rise to conflicts of interest. Some of our existing shareholders or their affiliates have sponsored, and may in the future sponsor, other entities engaged in or intending to engage in the credit swap business, some of which may compete with us. Certain of our existing shareholders and their affiliates have also entered into agreements with and made investments in numerous companies that may compete with us. Our existing shareholders may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as our existing shareholders continue to own a significant amount of our outstanding common shares, they will continue to be able to strongly influence or effectively control our decisions.

We do not intend to pay cash dividends on our common shares for the foreseeable future.

We do not intend to pay cash dividends on our common shares for the foreseeable future. We intend to retain all available funds for use in the operation and expansion of our business. Additionally, we are a holding company with no operations or significant assets other than our ownership of all of our subsidiaries. There are certain restrictions on Primus Financial contained in its operating guidelines which could affect the ability of Primus Guaranty to pay dividends in future years. The payment of dividends and making of distributions by each of Primus Guaranty and Primus Re is limited under Bermuda law and regulations. Any determination to pay cash dividends will be at the discretion of our board of directors and will be dependent upon our results of

9




operations and cash flows, our financial position and capital requirements, general business conditions, legal, tax, regulatory and any contractual restrictions on the payment of dividends and any other factors our board of directors deems relevant. See "Tax Considerations" for other consequences of owning our common shares.

We may not be able to continue to compete in the credit swap market.

The credit swap market is highly competitive. We face competition from providers of similar products, including certain insurance companies and affiliates of our shareholders, and, to a limited extent, the credit swap dealers of commercial and investment banks. Many of these competitors are more established, have substantially greater financial resources than we do and have established ongoing relationships with market participants giving them ready access to the credit swap marketplace. In addition, while there are significant business obstacles to overcome in establishing a similar enterprise to ours, there are no regulatory impediments for any new entrants to the credit swap market. To the extent new participants enter the credit swap market, competition may intensify. While we believe we have a number of competitive advantages over new entrants, there can be no assurance that increased competition will not materially adversely affect our business and financial condition.

We cannot assure you that we will not incur losses as we begin selling credit swap protection on tranches of pools of obligations of Reference Entities and selling credit swaps for non-investment grade obligations. We also cannot assure you that we will not incur losses as we continue to purchase credit protection.

We cannot assure you that we will not incur losses when we begin selling credit swap protection on tranches of pools of obligations of Reference Entities. Additionally, we may enter into the credit swap market for non-investment grade obligations where the risk of credit losses is typically higher than in our existing business. If we do not accurately analyze the Reference Entity credit risks and assess the risks and leverage associated with selling credit default protection for tranches of these pools, then we may suffer unexpected losses, which could adversely affect our results of operations and our credit ratings.

We have recently started on a limited basis to purchase credit swap protection to take advantage of short-term market fluctuations. This is a different activity from our normal course investing activity and is highly dependent on the absolute level of credit swap premiums, premium volatility and credit selection. We have a limited track record in buying protection and our performance to date has only added marginally to our net income. We cannot predict that opportunities will exist for us to buy protection nor can we assure you that we will not incur losses from this activity.

There can be no assurance that our diversification strategy will be effective or profitable.

We may experience delays, regulatory impediments and other complications in implementing our diversification strategy that could reduce our profitability and ultimately cause the strategy to fail. We plan to diversify through the development and marketing of ancillary businesses and, in select instances, by acquisition. Each new business line requires the investment of additional capital and the significant involvement of our senior management to acquire or develop a new line of business and integrate it with our operations.

We may have difficulty executing our growth strategy and managing our growth effectively.

Continuing to grow our business will require increased investment in personnel and the assumption of risks that may be greater than we have previously assumed. Unless our growth results in an increase in our revenues that is proportionate to the increase in our costs associated with this growth, our gross margin, and our future profitability, will be adversely affected.

We may be adversely affected by foreign currency fluctuations.

We enter into credit swaps where we are obligated to pay losses in currencies other than United States dollars. We may, from time to time, experience losses from fluctuations in the values of

10




non-United States currencies, which could significantly affect our results of operations. Credit swap premiums on Euro-denominated credit swaps are paid to us in Euros and we do not convert such premiums into United States dollars. However, all of our capital is United States dollar-denominated. We cannot assure you that the credit swap premiums retained will be sufficient to cover Euro-denominated losses and that we will not incur significant conversion costs in order to cover such losses.

We rely on our information technology and telecommunications systems, and the failure of these systems could disrupt our operations.

Our business is highly dependent upon the successful and uninterrupted functioning of our information technology and telecommunications systems. We rely on these systems to process our transactions, manage our risks and analyze our business. As a result, the failure of these systems could interrupt our operations and adversely affect our financial results.

Our operations may become subject to increased regulation under federal and state law or existing regulations may change, which may result in administrative burdens, increased costs or other adverse consequences for us.

There can be no assurance that new legal or administrative interpretations or regulations under the United States commodities and securities laws, or other applicable legislation on the federal or state levels, or in Bermuda or other applicable jurisdictions, will not result in administrative burdens, increased costs, or other adverse consequences for us. Periodically, proposals have been made in Congress to enact legislation that would increase regulation of the credit swap market. We cannot predict what restrictions any such legislation, if adopted, would impose and the effect those restrictions would have on our business. In addition, federal statutes allocate responsibility for insurance regulation to the states and state insurance regulators may interpret their state insurance laws to include credit swaps as insurance contracts subject to regulation. Again, we cannot predict what effect any such regulation would have on our business.

Credit swap buyers typically use credit swaps to manage risk and regulatory capital requirements that limit their credit exposure to a Reference Entity. Regulatory changes that modify the permissible limits of credit risk exposure, or affect the use of credit swaps to reduce risk, may have a material adverse effect on our business.

In addition, we believe that we are not required to be registered as an "investment company" under the Investment Company Act of 1940. If we are required to so register as an investment company, we would have to comply with a variety of restrictions, including limitations on our capital structure, restrictions on our investments, prohibitions on transactions with affiliates and compliance requirements that could limit our growth and increase our costs. There is no assurance that we could function effectively if we are required to register as an investment company.

Risks Related to Taxation

Our status as a PFIC may result in significant additional tax costs for shareholders who are
United States taxpayers.

We and Primus Barbados are likely to be and remain passive foreign investment companies, or PFICs, for United States federal income tax purposes. There are potentially adverse United States federal income tax consequences of investing in a PFIC for a shareholder who is a United States taxpayer. These consequences include the following: (1) if a shareholder makes a qualified electing fund, or QEF election, with respect to Primus Guaranty and Primus Barbados, the shareholder will have to include annually in his or her taxable income an amount reflecting an allocable share of the income of Primus Guaranty or Primus Barbados, regardless of whether dividends are paid by Primus Guaranty to the shareholder, (2) if a shareholder makes a mark-to-market election with respect to Primus Guaranty, the shareholder will have to include annually in his or her taxable income an

11




amount reflecting any year-end increases in the price of our common shares, regardless of whether dividends are paid by Primus Guaranty to the shareholder (moreover, it is unclear how such an election would affect the shareholder with respect to Primus Barbados), and (3) if a shareholder does not make a QEF election or a mark-to-market election, he or she may incur significant additional United States federal income taxes with respect to dividends on, or gain from, the sale or other disposition of, our shares, or with respect to dividends from Primus Barbados to us, or with respect to our gain on any sale or other disposition of Primus Barbados shares. See "Tax Considerations—Taxation of Shareholders—United States Holders—Passive Foreign Investment Companies."

If we are found to be engaged in a United States business, we may be liable for significant
United States taxes.

We believe that Primus Guaranty and Primus Barbados, both directly and through Primus Barbados' indirect ownership interest in Primus Financial (which for United States federal income tax purposes is treated as a partnership interest), will operate their businesses in a manner that should not result in their being treated as engaged in a trade or business within the United States. In particular, we believe that the sales of credit swaps by Primus Financial are best treated as transactions of an investor or trader and thus should not be treated as the conduct of a United States trade or business. Consequently, we do not expect to pay United States corporate income or branch profits tax on Primus Financial's income. However, because the determination of whether a foreign corporation is engaged in a trade or business in the United States is inherently factual and there are no definitive standards for making such a determination, there can be no assurance that the United States Internal Revenue Service, or IRS, will not contend successfully that Primus Guaranty, Primus Barbados or Primus Financial are engaged in a trade or business in the United States. The maximum combined rate of corporate income and branch profits tax that could apply to us, were we found to be engaged in a United States business and subject to United States corporate income and branch profits tax, is approximately 54.5% (subject to reduction to the extent that Primus Barbados then qualifies for the benefits currently provided in the tax treaty between the United States and Barbados). See "Tax Considerations—Taxation of Primus Guaranty and its Subsidiaries—United States Taxation—Primus Guaranty, Primus Barbados and Primus Financial."

If the IRS successfully challenges the treatment Primus Financial has adopted for its credit swap transactions, the timing and character of taxable income recognized by Primus Financial could be adversely affected.

Consistent with its treatment of the credit swaps sold by Primus Financial as the sale of options for United States federal income tax purposes, we have determined that in general Primus Financial will recognize income or loss as a protection seller only upon default or termination of the credit swaps. There is no definitive authority in support of the treatment by Primus Financial of its credit swaps as options for United States federal income tax purposes, and we do not intend to seek a ruling from the IRS on this point. In addition, the IRS has been studying the treatment of derivative transactions generally, including credit swaps, and certain proposals under discussion could be inconsistent with the tax treatment adopted by Primus Financial. If the IRS were to assert successfully that the credit swaps sold by Primus Financial should be treated differently or these proposals were adopted, (1) the timing of the income recognized by Primus Financial could be accelerated, (2) the character of this income could be altered and (3) Primus Barbados, as a non-United States person, could be subject to United States income or withholding tax at the rate of 30%. In addition, were these changes in character to apply and were Primus Barbados (through its investment in Primus Financial) found to be engaged in a United States trade or business, Primus Barbados's recognition of taxable income would be accelerated. See "Tax Considerations—Taxation of Primus Guaranty and its Subsidiaries—United States Taxation—Primus Guaranty, Primus Barbados and Primus Financial."

12




Risks Related to Our Status as a Bermuda Company

Changes to the legal environment under which we operate could have a material adverse effect on our business.

There can be no assurances that changes in Bermuda law would not have a material adverse impact on our viability. Furthermore, changes in interpretation of Bermuda law or United States law could also have a material adverse impact.

It may be difficult to enforce service of process and enforcement of judgments against us and our officers and directors.

Because Primus Guaranty is organized under the laws of Bermuda, it may not be possible to enforce court judgments obtained in the United States against Primus Guaranty based on the civil liability provisions of the federal or state securities laws of the United States in Bermuda or in countries other than the United States where Primus Guaranty has assets. In addition, there is some doubt as to whether the courts of Bermuda and other countries would recognize or enforce judgments of United States courts obtained against Primus Guaranty or its directors or officers based on the civil liabilities provisions of the federal or state securities laws of the United States, or would hear actions against Primus Guaranty or those persons based on those laws. We have been advised by our legal advisors in Bermuda that the United States and Bermuda do not currently have a treaty providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters. Therefore, a final judgment for the payment of money rendered by any federal or state court in the United States based on civil liability, whether or not based solely on United States federal or state securities law, would not automatically be enforceable in Bermuda. There are grounds upon which a Bermuda court may not enforce the judgments of United States courts and some remedies available under the laws of United States jurisdictions, including some remedies available under United States federal securities laws, may not be permitted under Bermuda courts as contrary to public policy in Bermuda. Similarly, those judgments may not be enforceable in countries other than the United States where Primus Guaranty has assets. Further, no claim may be brought in Bermuda by or against Primus Guaranty or its directors and officers in the first instance for violation of United States federal securities laws because these laws have no extraterritorial application under Bermuda law and do not have force of law in Bermuda; however, a Bermuda court may impose civil liability, including the possibility of monetary damages, on Primus Guaranty or its directors and officers if the facts alleged in a complaint constitute or give rise to a cause of action under Bermuda law.

United States persons who own our common shares may have more difficulty in protecting their interests than United States persons who are shareholders of a United States corporation.

The Companies Act, 1981, as amended, of Bermuda, or the Bermuda Companies Act, which applies to Primus Guaranty and Primus Re, differs in certain material respects from laws generally applicable to United States corporations and their shareholders. As a result of these differences, United States persons who own our shares may have more difficulty protecting their interests than would United States persons who own common shares of a United States corporation. To further understand the risks associated with United States persons who own our common shares, see "Description of Share Capital—Differences between Bermuda and Delaware Corporate Law" for more information on the differences between Bermuda and Delaware corporate laws.

We may become subject to taxes in Bermuda after 2016, which may have a material adverse effect on our financial condition and operating results and on an investment in our common shares.

The Bermuda Minister of Finance, under the Exempted Undertakings Tax Protection Act 1966, as amended, of Bermuda, has given each of Primus Guaranty and Primus Re an assurance that if any legislation is enacted in Bermuda 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, then the imposition of any such tax will not be applicable to Primus Guaranty, Primus Re or any of

13




their respective operations, shares, debentures or other obligations (except insofar as such tax applies to persons ordinarily resident in Bermuda or to any taxes payable by us in respect of real property or leasehold interests in Bermuda held by Primus Guaranty or Primus Re) until March 28, 2016. Given the limited duration of the Minister of Finance's assurance, we cannot be certain that we will not be subject to any Bermuda tax after March 28, 2016. Since we are incorporated in Bermuda, we will be subject to changes of law or regulation in Bermuda that may have an adverse impact on our operations, including imposition of tax liability.

The effect of Bermuda's letter of commitment to the OECD to eliminate harmful tax practices is uncertain and could adversely affect our tax status in Bermuda.

A number of multinational organizations, including the Organization for Economic Cooperation and Development, the European Union, the Financial Action Task Force and the Financial Stability Forum, have all recently identified some countries as not participating in adequate information exchange, engaging in harmful tax practices or not maintaining adequate controls to prevent corruption, such as money laundering activities. The Organization for Economic Cooperation and Development, which is commonly referred to as the OECD, has published reports and launched a global dialogue among member and non-member countries on measures to limit harmful tax competition. These measures are largely directed at counteracting the effects of tax havens and preferential tax regimes in countries around the world. In the OECD's report dated June 26, 2000, Bermuda was not listed, and continues not to be listed as an "uncooperative tax haven" because it had previously signed a letter committing itself to eliminate harmful tax practices by the end of 2005, and to embrace international tax standards for transparency, exchange of information and the elimination of any aspects of the regimes for financial and other services that attract business with no substantial domestic activity. However, it is possible that the OECD could change its view in the future and decide to list Bermuda as an uncooperative tax haven, or that one of the other multinational organizations could take a different view from the OECD and decide to recommend sanctions against Bermuda. We are not able to predict what changes will arise from the commitment or whether such changes will subject us to additional taxes and reduce our net income.

Risks Related to this Offering

We cannot predict how actively our common shares will trade, the possible volatility of our share price or the effect that these factors may have on the value of the common shares you purchase in this offering.

The public offering price of our common shares offered by this prospectus will be determined by negotiation between us and the representatives for the underwriters. The price of our common shares after this offering may fluctuate widely. The reasons for these fluctuations may include the investment community's perception of our prospects and of our industry in general. Differences between our actual operating results and those expected by investors and analysts and changes in analysts' recommendations or projections could also affect the price of our common shares. Other factors potentially causing volatility in the price for our common shares may include:

•  changes in general economic or market conditions and broad market fluctuations, particularly those affecting the prices of the common shares of companies engaged in businesses similar or related to our business;
•  how actively our shares trade; and
•  the research reports that industry or securities analysts publish about us or our business.

We are applying to have our common shares listed on the NYSE. Such a listing does not, however, guarantee that an active and liquid trading market for our common shares will develop.

Substantial future sales of our common shares in the public market could cause our share price to fall.

Additional sales of our common shares in the public market after this offering, or the perception that these sales could occur, could cause the market price of our common shares to decline. Upon

14




completion of this offering, we will have                      common shares outstanding. All shares sold in this offering will be freely transferable without restriction or additional registration under the Securities Act of 1933, as amended, or Securities Act. The remaining common shares outstanding after this offering will be available for sale, subject to the 180-day lock up agreements under which our directors, executive officers and all of our shareholders have agreed not to sell or otherwise dispose of their common shares in the public market, and subject to the manner of sale and notice requirements and the volume limitations on sales of shares contained in Rule 144 under the Securities Act.

Any or all of these shares may be released prior to expiration of the 180-day lockup period at the discretion of Lehman Brothers Inc., or Lehman Brothers. To the extent shares are released before the expiration of the lock-up period and these shares are sold into the market, the market price of our common shares could decline. Immediately following the 180-day lockup period,                      of our common shares outstanding after this offering will become available for sale. The remaining common shares will become available for sale at various times thereafter upon the expiration of one-year holding periods.

In addition, beginning 180 days after this offering, the holders of approximately                      common shares will be entitled to rights to cause us to register the sale of those shares under the Securities Act. Registration of these shares under the Securities Act would result in these shares, other than shares purchased by our affiliates, becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. See "Shares Eligible for Future Sale".

Purchasers in this offering will immediately experience substantial dilution in net tangible book value.

Because our common shares have in the past been sold at prices substantially lower than the initial public offering price that you will pay, you will suffer immediate dilution of $                     per share in pro forma net tangible book value, based on an assumed initial offering price of $                     per share, the midpoint of the range set forth on the cover page of this prospectus. The exercise of outstanding options and warrants may result in further dilution. See "Dilution".

Our anti-takeover provisions could prevent or delay a change of control of our company, even if a change of control would be beneficial to our shareholders, and could impede an attempt to replace or remove our directors, which could diminish the value of our common shares.

Our Bye-laws contain provisions that may make it more difficult for shareholders to replace directors even if the shareholders consider it beneficial to do so. In addition, these provisions could delay or prevent a change of control that a shareholder might consider favorable. For example, these provisions may prevent a shareholder from receiving the benefit from any premium over the market price of our common shares offered by a bidder in a potential takeover. Even in the absence of an attempt to effect a change in management or a takeover attempt, these provisions may adversely affect the prevailing market price of our common shares if they are viewed as discouraging takeover attempts in the future:

For example, our Bye-laws contain the following provisions that could have such an effect:

•  election of our directors is staggered, meaning that only one-third of our directors are elected each year;
•  shareholders have only limited ability to remove directors;
•  authorization, without prior shareholder approval, to create and issue preferred shares with voting or other rights or preferences that could impede the success of any attempt to acquire us or change our control, commonly referred to as "blank check" preferred shares;
•  our directors may decline to approve or register the transfer of any common shares on our share register if it appears to the board of directors that any adverse tax, regulatory or legal consequences to us, any of our subsidiaries or any registered owner of our shares or its affiliates, would result from such transfer (other than such as our board of directors considers to be minimal); and

15




•  business combinations with persons, who acquire 15% or more of our common shares without our board's approval, are restricted for three years.

We will incur increased costs as a result of being a public company.

As a public company, we will incur annually significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the Securities and Exchange Commission, or SEC, and NYSE, have required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. For example, as a result of becoming a public company, we have added independent directors, created additional board committees and will be implementing policies regarding internal controls and disclosure controls and procedures. In addition, we will incur additional costs associated with our public company reporting requirements. We also expect these new rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate with assurance the amount of additional costs we may incur or the timing of such costs.

16




SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this prospectus regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words "anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "project," "will," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this prospectus, particularly in the "Risk Factors" section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not assume any obligation to update any forward-looking statements.

17




USE OF PROCEEDS

We expect that the net proceeds we will receive from the sale of the common shares offered by us will be approximately $            , based on an assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We currently intend to use up to $60.0 million of the net proceeds of this offering to provide additional capital to Primus Financial. The remainder of the proceeds from the offering will be used as working capital and for general corporate purposes, including expanding our credit swap business and pursuing opportunities in complementary businesses. We will not receive any of the proceeds from the sale of shares by the selling shareholders.

We have not yet determined all of our expected expenditures, and we cannot estimate the amounts to be used for each purpose set forth above. Accordingly, our management will have significant flexibility in applying the net proceeds of this offering. Pending use of the net proceeds as described above, we intend to invest the net proceeds of this offering in United States government securities and money market instruments.

DIVIDEND POLICY

We intend to retain all available funds for use in the operation and expansion of our business and do not anticipate paying any cash dividends for the foreseeable future. Any determination to pay cash dividends will be at the discretion of our board of directors and will be dependent upon our results of operations and cash flows, our financial position and capital requirements, general business conditions, legal, tax, regulatory and any contractual restrictions on the payment of dividends and any other factors our board of directors deems relevant. See "Prospectus Summary—Notice to United States Investors—Tax Consequences of Owning Our Shares".

We are a holding company and have no direct operations. Our ability to pay dividends depends, in part, on the ability of our subsidiaries to pay distributions to us.

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 gains or losses on derivatives). Primus Financial is further restricted from paying dividends under the terms of its Floating Rate Cumulative Preferred Stock, or PFP Cumulative Preferred Stock, unless all of the cumulative distributions on the PFP Cumulative Preferred Stock 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. Our insurance subsidiary, Primus Re, is also subject to significant regulatory restrictions limiting its ability to declare and pay dividends.

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

18




CAPITALIZATION

The following table sets forth our capitalization as of December 31, 2003:

•  on an actual basis;
•  as adjusted to give effect to (i) a         for          reverse share split to be effected immediately prior to the completion of this offering;
•  the automatic conversion of all outstanding shares of our convertible preferred shares into an aggregate of          common shares; and
•  the sale of a total of          common shares in this offering at an assumed public offering price of $             per share, the midpoint of the range set forth on the cover of the prospectus.

This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the notes thereto included elsewhere in this prospectus.


($ in thousands) As of December 31, 2003
  Actual As Adjusted
             
Preferred shares of subsidiary $ 98,521        
             
Shareholders' equity:            
Common shares, $0.01 par value, 500,000,000 shares authorized, 20,800,000 shares issued and 20,488,333 shares outstanding actual and                      shares issued and                      outstanding as adjusted   230        
Additional paid-in-capital   1,325        
Series A Convertible Voting Preferred Shares,
$0.01 par value, 100,000,000 shares authorized, 6,212,000 shares issued and outstanding
  143,908        
Warrants   1,070        
Retained earnings   68,305        
Total shareholders' equity   214,838        
Total debt, preferred shares of subsidiary and shareholders' equity $ 313,359   $                

The number of common shares excludes:

•            common shares issuable upon exercise of options outstanding as of December 31, 2003, under our employee option plan, with a weighted average exercise price of $             per share;
•            common shares issuable upon exercise of warrants outstanding as of December 31, 2003, with an exercise price of $             per share and an expiration date of March 14, 2007; and
•             additional common shares reserved for issuance under our employee share incentive plans.

19




DILUTION

If you invest in our common shares, your interest will be diluted to the extent of the difference between the public offering price per share of our common shares and the pro forma as adjusted net tangible book value per share of our common shares immediately after this offering. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the pro forma number of shares of our common shares outstanding. Investors participating in this offering will incur immediate, substantial dilution.

Our net tangible book value at December 31, 2003, before adjustment for this offering, was approximately $            , or approximately $             per share, after giving effect to the conversion of all outstanding shares of our convertible preferred shares into common shares upon the closing of this offering. After giving effect to the sale of common shares in this offering, at an assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, and after deducting the estimated offering expenses, our as adjusted net tangible book value at December 31, 2003 would have been $             or $             per share. This represents an increase in net tangible book value of $             per share to our existing shareholders and an immediate dilution (i.e., the difference between the public offering price per unit and the net tangible book value per share adjusted for this offering) at December 31, 2003 of $             per share to purchasers of the common shares offered hereby. The following table illustrates this per share dilution:


Assumed initial public offering price per share       $               
Net tangible book value per share
at December 31, 2003
$               
Increase in net tangible book value per share
attributable to the new investors
$               
As adjusted net tangible book value per share after this offering       $               
Dilution per share to new investors       $               

The above table excludes the possible exercise of          outstanding warrants to purchase our common shares which have an exercise price of $             per share and expire on March 14, 2007.

Assuming the underwriters' over-allotment option is exercised in full, the net tangible book value at December 31, 2003 would have been $            , or $             per share, the immediate increase in net tangible book value of shares owned by existing shareholders would have been $             per share, and the immediate dilution to purchasers of the common shares in this offering would have been $             per share.

The following table summarizes at December 31, 2003, after giving effect to the sale of            common shares at an assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, the number of common shares purchased from us, the total consideration paid to us for those shares and the consideration given by the existing shareholders and by the new investors assuming approximately            common shares are outstanding:


  Shares
Purchased
Total Consideration Average Price
Per Share
  Number Percent Amount Percent
Existing shareholders                    $              $           
New investors                              
Total         100.00 $     100.00      

20




SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following tables present our historical financial and operating data as of the dates or for the periods indicated. We derived the data for the years ended December 31, 2003, 2002 and 2001 from our consolidated financial statements, which have been prepared in accordance with United States GAAP and audited by Ernst & Young LLP. The company's historical financial statements for the years ended December 31, 2000 and 1999 have not been audited, but, in the opinion of management, contain all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of our results of operations for these periods and financial position as of those dates. The results of operations for past accounting periods are not necessarily indicative of the results to be expected for any future accounting periods. Until March 2002, we were in a development stage. We capitalized Primus Financial on March 14, 2002 and it began to sell credit swaps in June 2002. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.


($ in thousands, except per share data) Year Ended December 31,
  2003 2002 2001 2000 1999
        (unaudited) (unaudited)
Consolidated Statements of Operations Data:                              
Revenues:                              
Net premiums earned $ 38,516   $ 11,768   $   $   $  
Net realized gains on credit swaps   17,629     2,843              
Net unrealized gains (losses) on credit swaps   46,739     (213            
Interest income earned   2,617     1,610     2     5     3  
Other income   107     12              
Total revenues $ 105,608   $ 16,020   $ 2   $ 5   $ 3  
                               
Expenses:                              
Employee compensation $ 11,701   $ 6,428   $   $   $  
Other expenses   13,754     8,115              
Development stage expenses       4,292     2,789     3,109     1,001  
Total expenses $ 25,455   $ 18,835   $ 2,789   $ 3,109   $ 1,001  
                               
Distributions on preferred securities of subsidiary $ (1,854 $   $   $   $  
                               
Income (loss) before benefit (provision) for income taxes $ 78,299   $ (2,815 $ (2,787 $ (3,104 $ (998
Benefit (provision) for income taxes   172     (254            
Net income (loss) $ 78,471   $ (3,069 $ (2,787 $ (3,104 $ (998
                               
Basic earnings (loss) per share(2) $ 3.90   $ (0.15 $ (0.14 $ (258.67 $ (83.17
Diluted earnings (loss) per share(2)(3) $ 0.29   $ (0.15 $ (0.14 $ (258.67 $ (83.17
                               
Weighted average number of common shares outstanding: (2)                              
Basic   20,135     20,083     19,828     12     12  
Diluted   269,638     20,083     19,828     12     12  
                               
Other Financial Data (unaudited):                              
Core earnings (losses)(1) $ 16,312   $ (1,657 $   $   $  

21





($ in thousands, except per share data) As of December 31,
  2003 2002 2001 2000 1999
Balance Sheet Data:                              
Assets                              
Cash and cash equivalents $ 257,967   $ 220,975   $ 136   $ 138   $ 123  
Short-term investments   3,968                  
Unrealized gain on credit swaps, at fair value   46,594     5,705              
Fixed assets and capitalized software   7,124     12,322              
Other assets   5,776     5,859              
Total assets $ 321,429   $ 244,861   $ 136   $ 138   $ 123  
                               
Liabilities and shareholders' equity                              
Unrealized loss on credit swaps, at fair value $ 68   $ 5,918   $   $   $  
Other liabilities   8,002     5,191     6,981     4,328     1,208  
Total liabilities $ 8,070   $ 11,109   $ 6,981   $ 4,328   $ 1,208  
                               
Preferred securities of subsidiary   98,521     98,521                    
                               
Shareholders' equity                              
Common Stock $ 230   $ 208   $ 240   $ 12   $ 12  
Convertible Preferred Stock   143,908     143,908     12          
Retained earnings (accumulated deficit)   68,305     (10,166   (7,097   (4,310   (1,205
Additional paid-in-capital   1,325     211         108     108  
Warrants   1,070     1,070              
Total shareholders' equity (deficit) $ 214,838   $ 135,231   $ (6,845 $ (4,190 $ (1,085
                               
Total liabilities, preferred securities of subsidiary and shareholders' equity $ 321,429   $ 244,861   $ 136   $ 138   $ 123  
(1) In addition to United States GAAP net income, we use an additional performance measure, which we refer to as "Core Earnings." We believe this adjusted measure provides management and shareholders with a tool that assists in the long-term evaluation of our performance in a manner consistent with our primary business strategy, which is generally to sell credit swaps and hold them to maturity. Although we generally hold the credit swaps we sell until maturity, we are required under United States GAAP to carry our credit swap portfolio at fair value, which produces significant changes in our net income as the market values of our credit swaps fluctuate. Because we are required under United States GAAP to carry our credit swaps at fair value, we are not permitted to record a reserve for anticipated losses due to credit events. The computation of Core Earnings does not recognize gains or losses based on marking to market our portfolio of credit swaps that we had sold or purchased. Additionally, unlike United States GAAP net income, Core Earnings does not immediately recognize realized gains related to unwinds or assignments of credit swaps sold prior to maturity. To compute Core Earnings, we amortize any such gains over the remaining original lives of the contracts that were terminated or assigned. We include realized losses on such terminations and assignments in Core Earnings immediately. Non-recurring development stage expenses are excluded from the calculation of Core Earnings.

22





($ in thousands) Year Ended December 31,
  2003 2002
             
Net United States GAAP income (loss) $ 78,471   $ (3,069
             
Add development stage expenses       4,292  
             
Add (less) change in fair value on credit swaps sold   (46,739   213  
             
Less realized gains on terminated credit swaps sold   (18,313   (3,146
             
Add amortization of gains on the
unwind or assignment of credit swaps sold
  2,893     53  
             
Core earnings (losses) $ 16,312   $ (1,657
(2) Share amounts and strike prices will be adjusted to reflect a reverse share split we expect to effect prior to the completion of this offering.
(3) Includes conversion of Series A preferred shares immediately prior to the consummation of this offering.

23




MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes which appear elsewhere in this prospectus. It contains forward-looking statements that involve risks and uncertainties. Please see "Special Note Regarding Forward-Looking Statements" for more information. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly under the headings "Risk Factors" and "Special Note Regarding Forward-Looking Statements."

Overview

Our principal business is selling credit protection under which we assume the risk of default on investment grade credit obligations through our subsidiary, Primus Financial. Primus Financial has the highest counterparty credit ratings offered by S&P (AAA) and Moody's (Aaa) and is managed by an experienced team of professionals who have expertise in credit analysis, trading, risk management and market analysis.

In exchange for a fixed quarterly premium we agree, upon a default or other credit event affecting a Reference Entity, to pay a counterparty the notional amount for a specified debt obligation of the Reference Entity. Under these circumstances, the obligation is likely to have a market value of substantially less than par and we would incur an economic loss as a result. We monitor the credit swap market and the credit quality of individual Reference Entities on a continuous basis. If we believe there is an increased probability of a Reference Entity credit event, we may hedge our risk through the purchase of offsetting credit swaps with respect to the specific Reference Entity or by terminating the related credit swaps we have sold. As of March 31, 2004, we had not suffered a credit event on any credit swap we have sold and our hedging transactions have been limited in scope. Further details are included in our discussion of operating results.

The market for credit swaps and, consequently, premium levels are affected by a number of factors, including defaults by Reference Entities, volatility in the capital markets, economic conditions, changes in interest rates and political uncertainties. During 2002, premium levels on credit swaps were generally high compared with historical averages. This presented us with an opportunity to sell credit swaps at attractive levels and by December 31, 2002, the notional amount of our outstanding portfolio of credit swaps was $4.7 billion. However, throughout 2003 there was a fairly steady decline in credit swap premium levels. The decline in premiums increased the fair value of our credit swap portfolio as the swaps we had written during 2002 and the early part of 2003 appreciated in value. During 2003, we slowed the pace of portfolio growth as the premium levels became less attractive relative to the risks borne. At December 31, 2003, Primus Financial had $6.3 billion (in notional amount) of credit swaps outstanding with a weighted average remaining life of 2.7 years. In the first quarter of 2004, we have seen a general increase in credit swap premium levels in the market. This has presented more attractive opportunities to sell credit swaps and we have increased the pace of portfolio growth in 2004.

We expanded the range of our activities in 2003 to include the sale of Euro-denominated credit swaps, the purchase of credit swaps as investments and the sale of financial guaranty insurance protection. We started selling Euro-denominated credit swaps in February 2003 and by December 31, 2003, Euro-denominated credit swaps comprised 13.8% of the notional amount of our credit swap portfolio. At the end of 2003, we also began to purchase credit swaps as investments by buying credit swaps on selected Reference Entities at, we believe, relatively low credit swap premium levels with the expectation that the premium levels on these Reference Entities will rise. If the premium levels rise, we will be able to terminate the swaps at a gain. At December 31, 2003, we had purchased credit swaps as investments on a notional principal amount of $130.0 million. We carry these credit swaps at fair value, using valuation techniques similar to those used for the credit swaps we have sold. Additionally, in 2003 Primus Re issued its first financial guaranty protection on a total notional amount of obligations equaling $56.0 million.

24




Revenues

We receive premium income from the credit swaps we sell. In general, premiums are received quarterly in arrears and accrued daily into income. In accordance with United States GAAP, we carry our credit swaps on our balance sheet at their fair value. Changes in the fair value of our credit swap portfolio are recorded as unrealized gains or losses in our consolidated income statement. Changes in the fair value of our 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. We generally hold the credit swaps we sell to maturity, at which point, assuming no credit event has occurred, the cumulative unrealized gains and losses on each credit swap would equal zero.

On occasion, and based on a number of factors, including prevailing market conditions, we terminate a credit swap that we have sold before the contractual maturity date. This is done through an agreed termination with our counterparty (an unwind) or through the assignment of our rights and obligations under the credit swap to a third party (an assignment). In general, we receive or pay a cash settlement in connection with the unwind or assignment of the credit swap. The settlement amount is determined by negotiation with the counterparty or assignee party, based on prevailing market conditions at the time of the unwind or assignment. The amounts we receive or pay for an unwind or assignment are included as realized gains (losses) on credit swaps sold in the period in which the unwind or assignment occurs.

We invest our cash in short term, high quality fixed income instruments. The yield on our investments is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of the invested assets. We invest in obligations of the United States of America or direct obligations of United States agencies rated AAA and Aaa by S&P and Moody's, respectively, commercial paper rated A-1 and P-1 by S&P and Moody's, respectively, and money market funds.

Expenses

Our expenses are primarily employee compensation and other administrative expenses, including rent for our premises, professional fees and depreciation of our software and fixtures. Employee compensation expense includes salaries and benefits, cash bonuses and stock-based compensation, which is addressed further under "—Critical Accounting Policies". We expect to hire approximately five to seven people in professional positions during 2004, with a corresponding increase in employee compensation.

Distributions on Preferred Securities

Primus Financial has issued auction rate perpetual preferred securities that pay periodic distributions. The cost of these distributions is included in our income statement as distributions on preferred securities of a subsidiary. Further details of the nature and cost of these securities is included in our discussion of liquidity and capital resources. Over time, we expect to issue other debt and preferred securities, which will necessitate periodic interest payments and preferred distributions. Primus Financial is considering issuing up to $100.0 million of subordinated notes.

Income Taxes

Primus Guaranty, Primus Barbados and Primus Financial are not expected to be engaged in the active conduct of a trade or business in the United States and as a result are not expected to be subject to United States federal, state or local income tax. Primus Asset Management is a United States domiciled corporation and is subject to United States federal, state and local income tax on its income, including on fees received from Primus Financial. Primus Re may be subject to United States federal, state or local income tax, or Primus Asset Management may be required to include all or part of Primus Re's income in calculating its liability for United States federal, state or local income tax, depending on the manner in which Primus Re conducts its business and the tax elections it makes. For United States federal income tax purposes, Primus Guaranty and Primus Barbados are likely to be treated as passive foreign investment companies. For more information, please see "Tax Considerations."

25




Critical Accounting Policies

Valuation of Credit Swaps

From the inception of our business, we have applied Statement of Financial Accounting Standards, or SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," or SFAS 133, which established accounting and reporting standards for derivative instruments. SFAS 133 requires recognition of all credit swaps on the balance sheet at fair value. As a consequence of carrying our credit swaps at fair value, we are not permitted to record a reserve for anticipated losses due to credit events. The market premiums used to determine fair value generally take into account the expectation of such events. Changes in the fair value of our credit swap portfolio are included in our consolidated income statement as unrealized gains (losses) on credit swaps.

The fair value of the credit swaps depends on a number of factors, primarily Reference Entity credit swap premiums and interest rates. The credit swaps are valued using market-standard pricing models which calculate the net present value of differences between future premiums on currently quoted market credit swaps and the contractual future credit swap premiums on contracts we have undertaken. Our pricing model has been internally developed but is benchmarked against a market-standard model. Generally, our model uses quoted market credit swap premium data on individual Reference Entities that we purchase from an independent pricing service. This service takes pricing information from a number of prominent dealers and brokers in the credit swap market across a range of standard maturities and restructuring terms, and creates average market premium quotes on specific Reference Entities.

Internal Use Software Costs and Formation Expenses

During our development stage (through March 13, 2002), we were developing our proprietary technology. The primary applications developed were (1) capital models to support Primus Financial's AAA/Aaa counterparty ratings and (2) a transactional platform to control our credit swap activities, ranging from trade administration to support for financial accounting and reporting.

The software and related costs of developing the capital model and control platform of approximately $12.4 million 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. Capitalized costs are reviewed periodically for impairment.

Stock-Based Employee Compensation Plans

Prior to 2003, we followed Accounting Principles Board, or APB, No. 25 "Accounting for Stock Issued to Employees". In 2003, we adopted the fair value approach on a prospective basis for recording stock-based employee compensation in accordance with the fair value method prescribed in SFAS 123 "Accounting for Stock-Based Compensation", as amended by SFAS 148 "Accounting for Stock-Based Compensation—Transition and Disclosure". Under these rules, compensation expense is recognized based on the fair value of stock options, restricted shares and restricted share units over the related vesting period. The fair value of the stock options granted is determined through the use of a market standard option-pricing model, which requires judgment as to appropriate volatility and interest rate factors. In the absence of a public market for our common shares, management and the board of directors estimate the market value of our common shares for all options, restricted share units and share issuances based on valuation opinions from independent valuation consultants.

Results of Operations for the Years ended December 31, 2003, 2002 and 2001

We were capitalized in March 2002 and started selling credit swaps in June 2002. Prior to March 2002, the company incurred development stage expenses, which are discussed further below. Since we were a development stage company prior to March 2002, comparisons of those periods to later periods are not relevant.

26




Net Premiums Earned

Net premiums earned were $38.5 million and $11.8 million in the years ended December 31, 2003 and 2002, respectively. Net premiums earned comprise the accrued and received credit swap premium income on credit swaps sold, premium expense for swaps purchased as investments and for hedging purposes and brokerage expenses. Credit swaps that we sold in 2002 generated $28.5 million of the net premiums earned for the year ended December 31, 2003, as a full year's premiums were earned on those credit swaps and only a partial year of premiums was earned on the credit swaps we sold throughout 2003. The table below shows the component parts of net premiums earned for the years ended December 31, 2003 and 2002.


($ in thousands) Year Ended December 31,
  2003 2002
Swap premium income on credit swaps sold $ 39,112   $ 12,155  
Swap premium expense on credit swaps purchased as investments   (19    
Swap premium expense on credit swaps purchased for hedging purposes   (135   (24
Brokerage expense   (442   (363
Total Net Premiums Earned $ 38,516   $ 11,768  

The notional amounts outstanding of credit swaps we sold were $6.3 billion and $4.7 billion at December 31, 2003 and 2002, respectively. Premium income on credit swaps sold grew in 2003 as a result of the expansion in our credit swap portfolio and because premium income was only earned for a portion of 2002 as our credit swap activity began in June 2002.

The premium expense accrued on credit swaps purchased as investments was $19,000 in the year ended December 31, 2003. This activity was new in 2003, and we therefore incurred no credit swap premium costs in 2002. At December 31, 2003, the credit swap notional amount outstanding on credit swaps purchased as investments was $130.0 million.

The notional amounts of credit swaps that we had purchased for hedging purposes were $5.0 million and $10.0 million at December 31, 2003 and 2002, respectively. The premium expense incurred as a result of our hedging activity rose in 2003 because we had hedge transactions in place for only a portion of 2002, whereas we had hedges in place throughout 2003.

As part of our credit swap purchase and sale activity, we use credit swap brokers on occasion to facilitate transactions. The brokerage expense incurred by Primus Financial was $442,000 and $363,000 in the years ending December 31, 2003 and 2002, respectively. The brokerage expense is recognized in the period in which the credit swaps are transacted.

Net Realized Gains (Losses) on Credit Swaps

Although our business strategy is generally to hold credit swaps we sell until maturity, during 2002 we began terminating selected credit swaps in our portfolio. At a time when credit swaps that we had previously sold had attractive market values, we were able to reduce our risk with respect to selected Reference Entities and our exposure to our counterparties by terminating certain credit swaps, which resulted in realized gains. Terminating transactions also allows us to accelerate premium receipts and provides for additional growth capacity within our credit swap portfolio. We terminated $977.0 million and $130.0 million of credit swaps sold during the years ended December 31, 2003 and 2002, respectively. Net realized gains on the early termination of credit swaps were $17.6 million and $2.8 million in the years ended December 31, 2003 and 2002, respectively. Net realized gains increased from 2002 to 2003 as a result of an increased volume of early terminations and because the general increase in the fair value of credit swaps in 2003 enabled us to terminate transactions at higher gains. As of December 31, 2003, we had not incurred a credit event on any credit swap we had sold.

27




Net realized gains (losses) for the years ended December 31, 2003 and 2002 are summarized below:


($ in thousands) Year Ended December 31,
  2003 2002
Net realized gains on terminated credit swaps sold $ 18,049   $ 2,843  
Net realized gains on terminated credit swaps purchased as investments   28      
Net realized losses on terminated credit swaps purchased for hedging purposes   (448    
Total Realized Gains on Credit Swaps $ 17,629   $ 2,843  

Net Unrealized Gains (Losses) on Credit Swaps

Net unrealized gains on credit swaps were $46.7 million for the year ended December 31, 2003, compared with a loss of $213,000 for the year ended December 31, 2002. The increase in unrealized gains on credit swaps reflects the change in the fair value of our credit swap portfolio and is primarily due to the reduction in market credit swap premium levels experienced during 2003. (See "Risk Factors—Risks Related to our Business—Variations in credit swap premiums could cause our earnings to be inconsistent and our stock price to fluctuate significantly.") The unrealized gains on credit swaps sold and credit swaps purchased as investments and for hedging purposes for the years ended December 31, 2003 and 2002 are summarized below:


($ in thousands) Year Ended December 31,
  2003 2002
Net unrealized gains on credit swaps sold $ 46,663   $ 105  
Net unrealized gains on credit swaps purchased as investments   23      
Net unrealized gains (losses) on credit swaps purchased for hedging purposes   53     (318
Net total Unrealized Gains (Losses) on Credit Swaps $ 46,739   $ (213

Interest Income Earned

The company had interest income of $2.6 million, $1.6 million and $2,000 in the years ended December 31, 2003, 2002 and 2001, respectively. The increase in the interest income is attributable to the growth in the balances of cash equivalents and short-term investments during these periods. The average yields on the cash equivalent and short-term investments fell from 2.9% in 2001 to 1.3% in 2002 and to 1.1% in 2003, which reflects a general decrease in market interest rates over these periods.

Our cash, cash equivalents and short-term investments were approximately $261.9 million, $221.0 million and $136,000 as of December 31, 2003, 2002 and 2001, respectively.

Operating Expenses

Our operating expenses were $25.5 million, and $18.8 million for the years ending December 31, 2003 and December 31, 2002, respectively. Operating expenses for these years are summarized below:


($ in thousands) Year Ended December 31,
  2003 2002
Employee compensation $ 11,701   $ 6,428  
Excess-of-loss insurance premium   727     1,854  
Administrative expenses   13,027     6,261  
Development stage expenses       4,292  
Total Operating Expenses $ 25,455   $ 18,835  
Number of full-time employees at December 31   29     19  

The increase in employee compensation over these periods was primarily due to the increase in the number of employees as the business expanded its operations. The excess-of-loss insurance

28




premium expense relates to a surety policy to cover excess credit losses, which Primus Financial acquired in March 2002 and terminated in March 2003. Administration expenses include professional fees, banking and rating agency charges and amortization and depreciation expenses. Amortization and depreciation principally relates to the amortization of our internally developed software and the depreciation of our furniture and fixtures. Software amortization increased by approximately $3.2 million in 2003 as a result of the write-off of previously capitalized software that was no longer in active use by the company. The 2002 amount discussed above includes $4.3 million of development stage expenses are discussed below.

Development Stage Expenses

From 1998 to March 13, 2002, the company was engaged in creating its operating technology platform, raising capital and establishing the basis for its AAA/Aaa counterparty credit ratings. The company primarily incurred employee compensation, administrative and software development expenses. During this period, we were funded by external sources (see "—Liquidity and Capital Resources"). Development-stage expenses were $4.3 million in 2002 and $2.8 million in 2001.

Income Taxes

Benefits (provisions) for income taxes were $172,000 and ($254,000) for the years ending December 31, 2003 and 2002, respectively. As previously discussed, it is expected that only the income of Primus Asset Management and its subsidiary, Primus Re, are likely to be subject to United States federal, state and local income taxes. For more information, please see "Tax Considerations."

Net Income (Loss)

The company had net income (loss) of $78.5 million, ($3.1 million) and ($2.8 million) in the years ended December 31, 2003, 2002 and 2001 respectively. The increase in net income in 2003 was driven by the growth in our credit swap portfolio, coupled with the appreciation in its value.

Contractual Obligations

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 under the lease are as follows:


Contractual Obligations Payment due by period
  Total Less than 1 year 1-3 years 3-5 years More than 5 years
                               
Property Lease $ 6,481,475   $ 720,495   $ 1,494,580   $ 1,512,444   $ 2,753,956  

We have no other material long-term contractual obligations.

Liquidity and Capital Resources

Prior to commencement of operations (March 14, 2002), we were provided advances by Jay H. Shidler, a shareholder who continues to be a shareholder and director of Primus Guaranty. These advances were primarily to pay operating expenses prior to the commencement of operations. The shareholder was subsequently reimbursed for the advances. See "Certain Relationships and Related Transactions". On the commencement date, we were capitalized with $155.0 million from the issuance of convertible voting preferred shares to two subsidiaries of XL Capital Ltd, or XL, Transamerica Life Insurance Company, a subsidiary of AEGON USA, CalPERS/PCG and Radian Group Inc., or Radian. Concurrently with that issuance, Primus Financial obtained a $115.0 million excess-of-loss insurance policy from Radian Reinsurance, Inc. The policy was provided to cover credit losses in excess of Primus Financial's cash capital. Primus Financial terminated this policy in March 2003.

Primus Financial issued $110.0 million of PFP Cumulative Preferred Stock on December 19, 2002 in two series, Series I and Series II, to a trust. In conjunction with the receipt of the securities, the

29




trust issued $100.0 million of Money Market Preferred Securities Custodial Receipts, or MMP Receipts, in two series, Series A and Series B, to various institutional investors in a private placement. The trust also issued $10.0 million of Variable Inverse Preferred Securities Custodial Receipts that were retained by Primus Financial. One series pays distributions every 28 days based on an auction rate set on the prior business day and the other series makes payments quarterly, based on an auction rate, which is currently set annually. After December 19, 2012, Primus Financial may redeem the securities, in whole or in part, on any distribution date at $1,000 per share plus accumulated and unpaid dividends. However, Primus Financial is not required to redeem the securities, nor is it required to establish a sinking fund. For the year ended December 31, 2003, Primus Financial made net distributions to the trust's MMP Receipts in an amount equal to $1.9 million. Primus Financial is considering issuing up to $100.0 million of subordinated notes.

Additionally, as required by our operating guidelines, Primus Financial maintains a $37.5 million liquidity facility with Harris Trust and Savings Bank, or Harris Trust. The purpose of the liquidity facility is to provide Primus Financial with cash in the event it is obligated to purchase a Reference Entity's debt obligation as the result of a credit event and could not liquidate its investments to do so on a timely basis. The liquidity facility requires that Primus Financial have United States government securities available to pledge as collateral on any advances made under the facility. The facility is renewable on an annual basis at the option of Primus Financial or Harris Trust and has been extended through March 2005. There have been no credit events to date and there have been no borrowings under the facility.

We receive cash from the receipt of credit swap premiums, the net proceeds from the early termination of credit swaps, interest income earned on our investment portfolio and capital raising activities. Cash has been used to pay our operating expenses, administrative expenses, premiums on credit swaps we have purchased and preferred share distributions.

Primus Financial, in order to support its AAA/Aaa ratings, is required to maintain capital in an amount determined by the capital models it has agreed upon with S&P and Moody's. The capital required is primarily a function of its credit swap portfolio characteristics, Primus Financial's operating expenses and its tax position. Ernst & Young LLP performs weekly agreed upon procedures to assist Primus Financial in evaluating compliance with its operating guidelines. Retained cash flow and proceeds from financings are utilized to increase our capital resources to support our credit swap business.

With our current capital resources and anticipated future credit swap premium receipts and interest income, we believe we have sufficient liquidity to pay our operating expenses and preferred distributions over at least the next twelve months.

Our cash, cash equivalents and short-term investments were approximately $261.9 million, $221.0 million and $136,000 as of December 31, 2003, 2002 and 2001, respectively. Cash flows provided by (used in) operating activities, investing activities and financing activities were $43.4 million, $(4.6) million and $(1.9) million, respectively, for the years ended December 31, 2003, 2002 and 2001.

Additional Financial Measures

In addition to United States GAAP net income, we use an additional performance measure, which we refer to as "Core Earnings." We believe this adjusted measure provides management and shareholders with a tool that assists in the long-term evaluation of our performance in a manner consistent with our primary business strategy, which is generally to sell credit swaps and hold them to maturity. Although we generally hold the credit swaps we sell until maturity, we are required under United States GAAP to carry our credit swap portfolio at fair value, which produces significant changes in our net income as the market values of our credit swaps fluctuate. Because we are required under United States GAAP to carry our credit swaps at fair value, we are not permitted to record a reserve for anticipated losses due to credit events. The computation of Core Earnings does not recognize gains or losses based on marking to market our portfolio of credit swaps that we had sold nor those we had purchased. Additionally, unlike United States GAAP net income, Core Earnings does not immediately recognize realized gains related to unwinds or assignments of credit swaps sold

30




prior to maturity. To compute Core Earnings we amortize any such gains over the remaining original life of the contracts that were terminated or assigned. We include realized losses on such terminations and assignments in Core Earnings immediately. Non-recurring development stage expenses are excluded from the calculation of Core Earnings.

Net income, as computed for United States GAAP purposes, is adjusted to arrive at our Core Earnings. The reconciliation of GAAP net income to Core Earnings to for the years ended December 31, 2003 and December 31, 2002 is shown below:


($ in thousands) Year Ended December 31,
  2003 2002
Net GAAP income (loss) $ 78,471   $ (3,069
Add development stage expenses       4,292  
Add (less) change in fair value on credit swaps sold   (46,739   213  
Less realized gains on terminated credit swaps sold   (18,313   (3,146
Add (less) amortization gains on terminated credit swaps sold   2,893     53  
Core earnings (losses) $ 16,312   $ (1,657

Gains and losses from the early termination of credit swaps sold for the years ended December 31, 2003 and 2002 were as follows:


($ in thousands) Year Ended December 31,
  2003 2002
Realized gains on terminated credit swaps sold $ 18,313   $ 3,145  
Realized losses on terminated credit swaps sold   (264   (302
Net realized gains on terminated credit swaps sold $ 18,049   $ 2,843  
Realized gains on terminated credit swaps purchased as investments   28      
Realized losses on terminated credit swaps purchased for hedging purposes   (448    
Total Realized Gains (Losses) on Credit Swaps $ 17,629   $ 2,843  

Realized gains from the early termination of the credit swaps sold are amortized over the remaining life of the terminated contracts and as amortized as follows for Core Earnings computations:


($ in thousands) Year Ended December 31,
  2003 2002 Total
Amount of amortized gain recognized in:                  
2002 $ 0   $ 53   $ 53  
2003   2,224     669     2,893  
2004   4,563     671     5,234  
2005   4,313     669     4,982  
2006   4,253     668     4,921  
2007   2,796     416     3,212  
2008   164         164  
Total Amortized Gain Recognized $ 18,313   $ 3,146   $ 21,459  

Market and Counterparty 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 credit swap premium levels, which increase or decrease the fair value of our credit swap portfolio. (See "Risk Factors—Risks Related to our Business—Variations in credit swap premiums

31




could cause our earnings to be inconsistent and our stock price to fluctuate significantly.") Credit swap premiums change as a result of specific events or news related to a Reference Entity, such as a change in a credit rating by S&P and Moody's. Additionally, credit swap premiums 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 credit swap premium levels, and we expect fluctuations in the fair value of our credit swap portfolio as a result of these changes.

We face other market risks, which are likely to have a lesser impact upon our net income than those associated with credit swap premium 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 PFP 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 PFP 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 until after January 20 2005 when such MMP Receipts may revert to a 28-day auction cycle. Conversely, since almost all of our $261.9 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. To date, we have kept the premiums received from these transactions in Euro-denominated cash 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 similar event, which could adversely affect our results of operations. Our counterparties generally have investment grade credit ratings.

New Accounting Pronouncements

The Financial Accounting Standards Board, or FASB, issued FASB Interpretation 45, or FIN 45, in November 2003. FIN 45 provides accounting and disclosure requirements for certain guarantees, which encompass credit swaps. The accounting provisions of FIN 45, which are effective for certain guarantees issued or modified beginning January 1, 2003, will not have an effect on the consolidated financial statements as the company records credit swaps at fair value. The disclosure provisions of FIN 45 require that the company disclose (1) the nature of the credit swap portfolio, (2) the approximate term, (3) how the credit swaps arose, (4) the events requiring the company to perform under the credit swap, (5) the maximum potential amount of undiscounted future payments, and (6) the current carrying amount of the credit swap.

In January 2003, the FASB issued Interpretation No. 46, or FIN 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, or VIEs. 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.

We adopted the provisions of FIN 46R in 2003. FIN 46 was effective immediately for VIEs created after January 31, 2003. 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 PFP Cumulative Preferred Stock issued by the Primus Financial to the trust. As encouraged by FIN 46R, we have restated our prior year's financial statements to conform to the treatment. The adoption of FIN 46R had no impact on our financial condition or the results of operations.

32




In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. This statement amends SFAS 133 for decisions made as part of the Derivatives Implementation Group and clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. SFAS 149 did not have a material impact on our financial statements.

In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires that an issuer classify a financial instrument that is within its scope as a liability when that financial instrument embodies an obligation of the issuer. This statement was effective immediately for financial instruments entered into or modified after May 31, 2003, and to all other existing instruments at the beginning of the first interim period beginning after June 15, 2003. SFAS 150 did not have an impact on our financial statements.

33




INDUSTRY OVERVIEW

Overview of Credit Swaps

A credit swap is a financial instrument used to transfer the credit risk of a Reference Entity from one party to another for a given period of time. In a standard credit swap contract, one party, which we refer to as the protection buyer, purchases credit protection from another party, which we refer to as the protection seller, for an amount equal to the notional amount of a senior obligation (e.g., bond or loan) of a Reference Entity. For this protection, the protection buyer pays a credit swap premium to the protection seller. The premium is generally paid quarterly in arrears, but may be paid in full upfront in the case of a transaction with a short maturity. Generally, if a credit event occurs during the term of the credit swap, the protection seller pays the protection buyer the notional amount and takes delivery of the Reference Entity's obligation. Credit swaps are generally unconditional, irrevocable and noncancellable.

The basic transaction structure for credit swaps is as follows:

Credit events stipulated in credit swaps vary by transaction, but generally include: (1) bankruptcy, (2) failure to pay the underlying debt obligation, (3) repudiation of the debt obligation or moratorium on the payment of interest and principal on the debt obligation (generally for sovereign Reference Entities) and (4) restructuring of a debt obligation resulting in one or more material changes to an obligation. Credit events are subject to various minimum amounts and cure periods.

Upon the occurrence of a credit event, there are two methods to settle the transaction. Physical settlement is the predominant form of settlement. It requires the protection buyer to deliver the notional amount of the Reference Entity obligation to the protection seller in return for the notional amount paid in cash. Under the cash settlement method, payment is made by the protection seller to the protection buyer equal to the notional amount less the market value of the Reference Entity obligation. The market value is determined by referencing dealer quotes or observable market prices over a period of time after the credit event has occurred.

Credit Swap Characteristics

Credit swaps have several distinct structural features that make them particularly suitable for credit risk management applications.

•  Credit swaps are documented using standard forms of contracts developed by ISDA. The overall agreement defining the relationship between the parties is the ISDA Master Agreement, supplemented by a schedule of negotiated terms, and a master confirmation for credit swaps and/or specific confirmations for each transaction. The forms are generally accepted throughout the financial marketplace. This form of documentation standardization has significantly increased the liquidity of credit swaps.

34




•  Credit swaps define, separate, and isolate the credit risk from the other risks (e.g., interest rate risk) of an underlying obligation, allowing for a practical mechanism to manage credit risk efficiently (i.e., buy credit protection). The Reference Entity whose credit risk is being transferred need neither be a party to, nor be aware of, a credit swap transaction because the credit swap is not "attached" to the underlying obligation.
•  Credit swaps can be entered into quickly and are essentially tradable. Credit swap dealers are making two-way markets in a rapidly growing number of Reference Entity credits. In addition, there is a strong inter-dealer broker market.
•  Credit swaps can be custom-tailored to manage maturity exposures of an underlying obligation that is not available in the cash market. Additionally, they can enhance investment yields by creating replication transactions, which combine a credit swap (long or short credit risk) with a cash instrument to simulate a cash market investment or enhance the terms of an existing cash market investment.

Credit swaps and the credit protection that they provide are treated by commercial banks as on-balance sheet equivalents for regulatory capital and economic capital purposes. This treatment can provide for an effective hedge, as it results in offsetting positions (long and short) in the underlying credit risk. For a bank, this reduces its regulatory capital requirement and can improve its returns on regulatory and economic capital. The Basel II accord (an effort by international banking supervisors to improve the consistency of capital regulations) currently under consideration should serve to further enhance the regulatory capital advantages of credit swaps affected with counterparties such as us. Since credit swaps are market sensitive instruments whose value is dynamic, they are efficient and effective tools for hedging against changes in credit spreads of underlying cash instruments as well as default risk.

Growth in the Credit Swap Market

The credit swap market has developed from a small, niche segment of the capital markets to a global market that is rapidly growing with diversified product applications and a wide range of participants. Total notional outstanding of the global credit swap market (excluding asset swaps) has grown from approximately $180.0 billion at December 31, 1997 to $3.6 trillion as of December 31, 2003, according to the British Bankers Association and ISDA.

Credit Swaps Outstanding, 1997 – 2003

($ in billions)

Source: for 1997-2000: British Bankers Association and for 2001-2003: ISDA Market Survey

35




Growth in the number of market participants and market volume is forecast to continue at its current rapid pace, and is being driven primarily by the significant contribution that credit swaps are making to efficient risk management and rational credit pricing. Credit swaps have also been employed in structured products that allow investors to assume different levels of risk with respect to portfolios of underlying Reference Entities.

Industry Participants

Participants in the credit swap market have grown and diversified to include a wide range of financial institutions. Commercial banks are the most active participants in the credit swap market.

Commercial banks, the first major users of credit swap protection, use credit swaps to manage the regulatory and economic capital required to support their credit origination and lending operations. Active credit risk management allows financial institutions and corporations to continuously evaluate their portfolios of credit risk against regulatory and economic guidelines and to rebalance their portfolios based on the various trade-offs among client demands, capital requirements and risk-adjusted returns.

Non-bank participants in the credit swap market have expanded rapidly to include insurance companies, investment funds and industrial corporations.

Credit Swap Market Participants, December 31, 2002

The following chart illustrates the activity of participants in the credit swap market, measured by credit swaps outstanding.

Source: Risk Magazine 2003 Credit Derivatives Survey

Structured Products

The application of credit swaps has evolved over time, from single Reference Entities to baskets of Reference Entities, or portfolio credit swaps, to credit swap indices.

Portfolio credit swaps redistribute the credit risk of a credit swap portfolio across different tranches. Each tranche represents a different level of risk of loss, with some tranches assuming the first losses and others assuming further losses. Primary examples of portfolio credit swaps include synthetic collateralized debt obligations, or synthetic CDO's, and single tranche transactions.

•  Synthetic CDO's involve the structuring and selling of a fully capitalized transaction that matches the notional amount of the underlying credit swaps with income bearing securities. Synthetic CDO's are generally structured by dealers and sold to investors through private offerings.

36




•  Single tranche transactions are issuances in which there is only one piece of the capitalization structure placed with an investor. These transactions are generally structured by dealers and custom tailored for their investors. Dealers and their investors negotiate the Reference Entities to be included in the underlying credit swap portfolio, and the risk position the investor would like to assume against that portfolio.

Credit swap indices enable participants to either sell or buy credit protection against the credit risk of a credit swap portfolio. In the past few years, several indices have been developed by leading global financial institutions to offer participants a diverse, liquid vehicle for assuming or hedging exposure to difference credit markets. These vehicles have increased liquidity in the credit swap market and become industry benchmarks.

37




BUSINESS

Overview

Our principal business is selling credit protection under which we assume the risk of default on investment grade credit obligations. The protection we sell takes the form of a credit swap. In exchange for a fixed quarterly premium we agree, upon a default or other credit event affecting a Reference Entity to pay a counterparty a notional amount against delivery of the Reference Entity's debt obligation.

Primus Financial has the highest counterparty credit ratings offered by S&P (AAA) and Moody's (Aaa) and is managed by an experienced team of professionals who have expertise in credit analysis, trading, risk management and market analysis.

Primus Financial, our principal subsidiary, also intends to sell credit swap protection referencing risk tranches of pools of obligations of Reference Entities. Primus Financial's exposures are initially expected to be in a mezzanine position of any such risk, such that other parties would be assuming or retaining the risk of portfolio losses up to and beyond certain amounts. All investments would be in accordance with Primus Financial's operating guidelines, as revised to reflect the nature of tranched portfolio risk. Primus Financial will employ an internally developed model to evaluate tranched value and risk that will incorporate credit swap market premiums. Primus Financial will actively manage the tranched portfolio.

In addition, through our subsidiary Primus Re, we offer financial guaranty insurance products and, through our subsidiary Primus Asset Management, asset management services. Our financial guaranty insurance and asset management business leverages our expertise in credit analysis and quantitative risk assessment. We will evaluate opportunities to make strategic acquisitions to accelerate our entry into related businesses.

From our first sale of a credit swap in June 2002 through December 31, 2003, we have sold credit swaps referencing $8.0 billion (in notional amount) of debt obligations, of which $6.3 billion (in notional amount) remained outstanding at December 31, 2003.

Competitive Strengths

We believe we are well-positioned to continue to compete effectively in the credit swap market. The following are our competitive strengths:

Highest Available Counterparty Credit Ratings.     Primus Financial has a AAA ("extremely strong") counterparty credit rating from S&P and a Aaa ("exceptional") counterparty credit rating from Moody's, the highest of their eighteen and twenty-one rating levels, respectively. We believe that financial strength of a counterparty is an important consideration for buyers of credit swaps. Primus Financial's ratings provide it with a competitive advantage that affords access to a broader universe of potential counterparties and a greater capacity to incur credit risk than would be the case with lower counterparty credit ratings. In addition, our financial strength allows us to finance our operations at a relatively low cost. At December 31, 2003, Primus Financial had total capital resources of $241.1 million.

Experienced Management Team with Strong Market Relationships.    Our management team has extensive industry experience with strong and long-standing market relationships with most of the principal participants and counterparties in the credit swap market, which have allowed us to become widely accepted as a professional credit swap investor and counterparty. We believe these relationships will allow us to continue to expand our presence in the credit markets.

Disciplined Underwriting and Risk Management.    We underwrite credit risks through rigorous credit analysis that allows us to sell credit default protection on Reference Entities that we believe offer attractive risk-adjusted returns. Primus Financial's experienced credit staff manages the underwriting process and monitors the on-going risk profile of our portfolio. Our underwriting process has allowed us to create a portfolio of Reference Entities whose quality and diversity are designed to

38




mitigate our exposure to losses. We actively monitor fundamental credit information and market indicators regarding these Reference Entities and take action to limit or remove our exposure to a Reference Entity when we believe its risk of default exceeds acceptable levels.

Efficient and Scalable Operations.    We believe we have created customized, efficient and scalable operations which enable us to leverage our management's expertise and provide opportunities to realize increased profitability as our business grows and matures.

Business Strategy

The major elements of our strategy are:

Continue to Expand our Credit Swap Business.     We intend to leverage our competitive strengths to:

•  continue to build a diversified credit risk portfolio;
•  sell credit swaps referencing portfolios containing obligations of multiple Reference Entities;
•  expand the number and depth of our counterparty relationships;
•  actively manage the credit risk in our portfolio; and
•  increase and efficiently utilize our capital resources to support our growth.

Pursue Opportunities in Complementary Businesses.    We intend to diversify our sources of revenue by expanding into complementary businesses. These businesses may include managing third parties' credit swap portfolios and pursuing additional opportunities in the credit swap market, such as credit swaps referencing a broader range of obligations, including obligations that are below investment grade. As we continue to increase the breadth and volume of our services, we plan to selectively add personnel to support our activities. We will evaluate opportunities to make strategic acquisitions to accelerate our entry into related businesses.

Corporate Structure

We are a Bermuda company that was incorporated in 1998. Primus Financial is our principal operating subsidiary. We own all of the voting securities of Primus Financial through two intermediate holding companies. We also have a Bermuda registered insurer, Primus Re, that offers credit insurance protection to companies that prefer insurance products to credit swaps. We are currently owned primarily by XL, Transamerica Life Insurance Company, a subsidiary of AEGON USA, Pacific Corporate Group/CalPERS, Radian and our management. Our institutional shareholders are represented on our board of directors and provide us valuable assistance and expertise in conducting and expanding our business. The chart below shows the ownership structure of the group.

39




Primus Financial

Primus Financial is a AAA/Aaa rated provider of credit protection with respect to investment grade Reference Entities. It sells credit protection to selected counterparties through credit swaps. We believe that Primus Financial can generate attractive risk-adjusted returns by selling credit protection at credit swap premiums that exceed the predicted credit losses and operating expenses. Primus Financial may also purchase credit swap protection from counterparties on a limited basis when it believes that credit swap premiums are particularly low relative to the risk of a Reference Entity.

As of December 31, 2003, Primus Financial had $241.1 million of capital resources to support its AAA/Aaa counterparty ratings. This capital consists of $109.0 million of paid-in capital, which was contributed to Primus Financial by Primus Guaranty, $98.5 million of net proceeds from the issuance of PFP Cumulative Preferred Stock issued on December 19, 2002 and retained cash flow of $33.6 million. Primus Financial is considering issuing up to $100.0 million of subordinated notes.

    Credit Review and Approval Procedures

Primus Financial subjects each of the Reference Entities rated investment grade by both S&P and Moody's and for which we are considering selling credit protection to a standardized credit review and approval procedure that evaluates, assesses and documents the underlying credit risk of a particular Reference Entity. This procedure is an essential component in determining whether we will sell protection on that Reference Entity and results in the assignment of an independent rating, or a Primus Rating, credit decision and position limit for each such entity. Quantitative inputs that support Primus Financial's credit decisions include the following:

•  S&P and Moody's ratings and history;
•  industry and company specific analyses and research by major investment and commercial banks;
•  financial statement analysis of the Reference Entity;

40




•  credit risk models based on the value of the Reference Entity's assets;
•  financial market indicators including bond spreads, stock prices and credit swap premiums; and
•  current news on the Reference Entity and its industry.

Primus Financial's credit approval process benefits from the fact that the typical investment grade Reference Entity is a public company which has a current rating and rating history, financial performance history and substantial company and third-party information on financial status and future business prospects. Primus Financial's experienced management professionals are responsible for its credit review and approval procedures. The approach to conducting a credit review results in the designation of a Primus Rating for all approved Reference Entities and is designed to generate consistent credit profiles and flag inconsistencies or issues that require further analysis. This iterative credit review process is also designed to result in judgments that take advantage of all the available information in the marketplace. After the initial review, all Reference Entities whose risks have been reviewed and a limit approved are periodically monitored.

    Credit and Risk Management Policies and Oversight

Policies governing the credit and risk management processes are set by the board of directors of Primus Financial through its Credit and Portfolio Risk Committee, or CPRC. The responsibilities of the CPRC include (1) at least annually reviewing and approving the credit-related policies and procedures of Primus Financial, (2) reviewing changes to its operating guidelines and our capital models and (3) reviewing capital levels and portfolio optimization strategies.

Primus Financial's Pricing and Portfolio Management Committee, or PPMC, provides oversight of Primus Financial's portfolio and implements the policies and procedures set by the board of Primus Financial and the CPRC. The PPMC (1) reviews market conditions with a view to providing guidance on portfolio priorities, (2) reviews deteriorating credits and proposed hedging or terminating strategies and (3) periodically directs in-depth reviews by industry sector, the results of which are reported to the CPRC.

    Transaction Pricing and Execution

Investment activity is limited to Reference Entities approved by, and position limits determined by, Primus Financial's credit professionals. Operating within those constraints, Primus Financial's trading and investment professionals make investment decisions based on their view of risk-adjusted returns available in the market.

Primus Financial's counterparties are primarily major global financial institutions that act in their capacities as dealers and credit portfolio managers. Primus Financial receives pricing transparency and transaction opportunities from its counterparties on a daily basis.

Primus Financial considers the following when pricing and executing transactions:

•  economic and financial market conditions affecting credit markets and/or particular industry sectors;
•  conditions affecting the credit swap market and/or particular Reference Entities and/or particular industries;
•  credit swap pricing trends for a particular Reference Entity and its industry;
•  comparative analysis of risk-adjusted returns;
•  activity in the bond, collateralized debt obligation and other credit-linked markets and other technical factors affecting the pricing of credit swaps referenced to the obligations of particular Reference Entities; and
•  counterparty credit limit availability.

41




    Credit Swap Portfolio

As of December 31, 2003, our credit swap portfolio contained credit swaps referencing obligations totaling $6.3 billion (in notional amount) which had a weighted average credit rating of A/A2 (S&P/Moody's), and represented 350 Reference Entities spread across 37 industries in 22 countries. The percentages of our credit swaps that were denominated in United States dollars and Euros at December 31, 2003 were 86% and 14%, respectively. Reference Entities that were domiciled in the United States and outside the United States comprised 56% and 44%, respectively, of our credit swap portfolio at December 31, 2003.

Additionally, since Primus Financial's inception there have been no credit losses on the credit swap portfolio through December 31, 2003.

The following charts provide a summary of our portfolio as of December 31, 2003:

    Portfolio Distribution by S&P Rating

42




    Portfolio Distribution by S&P Industry

    Risk Management

Primus Financial monitors the Reference Entities in its credit swap portfolio on an ongoing basis. As part of the monitoring process, there is a continual review of the Reference Entities' credit ratings, financial reporting and modeling analyses. Additionally, each Reference Entity in Primus Financial's credit swap portfolio is reviewed at least quarterly, at which point its Primus Rating is reconfirmed. If Primus Financial determines that the risk of a default or other credit event of a Reference Entity exceeds acceptable levels, Primus Financial can reduce or eliminate its credit exposure by buying credit protection against that Reference Entity or by terminating its credit swaps referencing that Reference Entity.

From time to time, Primus Financial enters into transactions designed to reduce its risk positions. These include unwinding credit swaps, assigning credit swaps to third parties (with a novation of its obligations) or purchasing credit swaps that offset the risk of its positions. Risk reducing transactions may be motivated by credit considerations or by expectations regarding future price movements.

    Operating Guidelines

Primus Financial's operating guidelines have been negotiated with S&P and Moody's and specify various structural, portfolio and capital constraints with which Primus Financial must comply to maintain its highest counterparty credit ratings including (1) maximum credit exposure limits to industries, countries and Reference Entities, (2) credit ratings requirements of Reference Entities that are referenced in the credit swaps sold by Primus Financial and (3) maximum length of exposure to any single Reference Entity.

As stipulated in Primus Financial's operating guidelines, upon the occurrence of certain events Primus Financial must temporarily cease entering into new credit swaps until such event is cured. Events that would cause Primus Financial to cease entering into new credit swaps include a capital shortfall under the operating guidelines, the bankruptcy or other analogous event of Primus Financial,

43




a violation of the operating guidelines that is not cured within ten days upon the occurrence of a capital shortfall and 30 days in all other circumstances or a downgrade of Primus Financial to A ("strong") or A2 ("good financial security") or below by S&P or Moody's. If an event causing the cessation of new credit swaps is not cured, Primus Financial will not enter into new credit swaps and will runoff its outstanding portfolio of credit swaps.

As required by the operating guidelines, Primus Financial has obtained a $37.5 million liquidity facility from Harris Trust to provide it with additional liquidity, if necessary, to accommodate the timely purchase of a physically settled deliverable obligation upon the occurrence of a credit event. The liquidity facility has a maturity of one year and may be extended for successive one-year periods upon the request of Primus Financial and with the consent of Harris Trust. The current maturity date of the liquidity facility is March 13, 2005. Primus Financial intends to request an extension of this facility at each annual maturity date so long as it is required to do so by the operating guidelines. Primus Financial's borrowings under the liquidity facility are secured by the investment assets of Primus Financial.

    Capital Models and Verification Process

We have developed customized capital models that are cash flow-based simulations of portfolio performance. There is a unique capital model for each of S&P and Moody's. Ernst & Young LLP performs weekly agreed upon procedures to assist Primus Financial in evaluating compliance with its operating guidelines. Primus Financial intends to continue to hold sufficient capital resources to maintain its AAA/Aaa ratings.

Primus Financial uses our customized capital models to determine the sufficiency of its capital resources to meet the AAA/Aaa requirements of S&P and Moody's. The sufficiency of capital resources is in part determined by: (1) the notional amount of each credit swap in the portfolio; (2) the term of each credit swap; (3) the credit risk of each underlying Reference Entity; (4) credit swap premiums; (5) industry concentrations within the portfolio; and (6) Primus Financial's operating expenses and tax status.

    Counterparties

Strengthening and expanding relationships with our counterparties is an important element of our business. We have expanded the number of counterparties to whom we sell credit swaps from 20 at December 31, 2002, to 31 at December 31, 2003, primarily consisting of major global financial institutions. Primus Financial's top counterparty, and top five counterparties represented 20% and 65% of Primus Financial's credit swap portfolio outstanding, respectively. The following counterparties each accounted for more than 10% of our consolidated revenues for the fiscal year ended December 31, 2003: Citibank N.A., Credit Suisse First Boston International, an affiliate of Credit Suisse First Boston LLC, Lehman Brothers Special Financing Inc., an affiliate of Lehman Brothers and UBS AG. Lehman Brothers and Credit Suisse First Boston LLC are underwriters of this offering.

    Bankruptcy Remoteness and Governance of Primus Financial

We have structured Primus Financial so that it should not be consolidated with Primus Guaranty or any of its affiliates in the event of its or their bankruptcy. This is an element necessary to maintain Primus Financial's highest credit ratings from the rating agencies. Components of this bankruptcy remote structure include (1) a board of directors that includes two independent directors who are neither directors nor employees of Primus Financial or its affiliates and (2) a requirement that all agreements with any affiliated company are on an arm's-length basis.

Primus Asset Management

We provide, through Primus Asset Management, credit risk investment advisory and asset management services to Primus Financial and also offer such services to third parties. We advise our clients on the evaluation, selection and pricing of all risks for credit default protection, as well as monitor a client's credit exposure and make recommendations as to hedging their credit risks. In addition, we will also advise a client with respect to loss mitigation in the event of any credit events.

44




Primus Re

Primus Re is a Bermuda company registered as a Class 3 insurer under the Bermuda Insurance Act 1978, as amended, and related regulations, or the Bermuda Insurance Act, and operates as a financial guaranty insurance company prepared to act as a non-rated seller of credit swaps and financial guaranty insurance to the market. Financial guaranty insurance is a contract in which an insurance company receives a fee to provide credit protection on a debt instrument and therefore provides a transfer of risk economically similar to a credit swap.

Primus Re's business is to act as a conduit, or transformer, between parties interested in buying or selling protection in insurance form and other parties interested in assuming the opposite risk position in the form of credit swaps. Primus Re had conducted limited activities through December 31, 2003.

Investments

Our investment portfolio has been invested in short-term government securities, money-market instruments and other investment grade securities. Primus Financial has engaged Harris Investment Management to assist in the management of its fixed income portfolio and to act as its custodian to hold its securities portfolio. The operating guidelines limit Primus Financial's investments to United States government and agency securities, maturing within three years, as well as commercial paper.

Technology

We have developed a sophisticated, customized and scalable technology platform to support our credit swap activities. Our platform was built specifically to effect transactions in credit swaps and manage the resulting risks. It processes and records all of our transactions, and immediately generates confirming documentation as trades are input, thereby reducing the risk of disputes and facilitating our acceptance by counterparties as a professional market participant. Most constraints on our portfolio, including the operating guidelines and limits set by our credit professionals, are maintained in the platform, so that non-conforming transactions cannot be processed and compliance with all constraints can be monitored on a real-time basis. The platform contains extensive databases regarding Reference Entities, credit swap prices and other information required to generate financial and management reports. Our technology has been protected from failure through a variety of security measures, and through the use of fault tolerant hardware at a separate location with fully redundant communication and power back-ups. The platform is designed to permit the parallel processing of third party portfolios managed by Primus Asset Management, alongside Primus Financial's portfolio. The technology allows us to expand our activities at relatively low incremental cost and it helps us to control efficiently and evaluate our business and to ensure compliance with rating agency requirements.

Certain Bermuda Law Considerations

As a holding company, Primus Guaranty is not subject to Bermuda insurance regulations. However, the Bermuda Insurance Act regulates the insurance business of Primus Re, which is registered under that Act. Certain significant aspects of the Bermuda insurance regulatory framework and other relevant matters of Bermuda law are set forth below:

Certain Bermuda Law Considerations.    Primus Guaranty and Primus Re have been designated as non-residents for exchange control purposes by the BMA. Common shares may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act, which regulates the sale of securities in Bermuda. Primus Guaranty and Primus Re are each required to obtain the prior permission of the BMA for the issuance and free transferability of their shares. We expect prior to the completion of this offering that the BMA will have given its consent for the issue and free transferability of the common shares offered pursuant to this prospectus, as long as the shares of Primus Guaranty are listed on an appointed stock exchange (including the NYSE), to and among persons who are non-resident of Bermuda for exchange control purposes.

Primus Guaranty and Primus Re have each been incorporated in Bermuda as an "exempted company." Under Bermuda law, exempted companies are companies formed for the purpose of

45




conducting business outside Bermuda from a principal place in Bermuda. As a result, they are exempt from Bermuda laws restricting the percentage of share capital that may be held by non-Bermudians, but they may not participate in certain business transactions, including (1) the acquisition or holding of land in Bermuda (except as may be required for their business and held by way of lease or tenancy for terms of not more than 50 years) without the express authorization of the Bermuda legislature, (2) the taking of mortgages on land in Bermuda to secure an amount in excess of BD$50,000 without the consent of the Bermuda Minister of Finance, (3) the acquisition of any bonds or debentures secured by any land in Bermuda, other than certain types of Bermuda government securities or (4) the carrying on of business of any kind in Bermuda, except in furtherance of their business carried on outside Bermuda (and certain other limited circumstances) or under license granted by the Bermuda Minister of Finance.

We must comply with the provisions of the Bermuda Companies Act regulating the payment of dividends, and making distributions from contributed surplus and repurchases of shares. A company shall not declare or pay a dividend, or make a distribution out of contributed surplus, if there are reasonable grounds for believing that: (a) the company is, or would after the payment be, unable to pay its liabilities as they become due; or (b) the realizable value of the company's assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts. Under the Bermuda Companies Act, when a Bermuda company issues shares at a premium (that is for a price above the par value), whether for cash or otherwise, a sum equal to the aggregate amount or value of the premium on those shares must be transferred to an account called "the share premium account." The provisions of the Bermuda Companies Act relating to the reduction of the share capital of a company apply as if the share premium account were paid-up share capital of that company, except for certain matters such as premium arising on a particular class of shares which may be used in paying up unissued shares to be issued to shareholders as fully paid bonus shares. The paid-up share capital may not be reduced if on the date the reduction is to be effected there are reasonable grounds for believing that the company is, or after the reduction would be, unable to pay its liabilities as they become due. Similarly, no purchase by a company of its own shares may be effected if, on the date on which the purchase is to be effected, there are reasonable grounds for believing that the company is, or after the purchase would be, unable to pay its liabilities as they become due.

Exempted companies, such as Primus Guaranty and Primus Re, must comply with Bermuda resident representation provisions under the Bermuda Companies Act. Under Bermuda law, non-Bermudians (other than spouses of Bermudians, or holders of a permanent resident's certificate, or holders of a working resident's certificate) may not engage in any gainful occupation in Bermuda without an appropriate governmental work permit. A work permit may be granted or extended upon showing that, after proper public advertisement, no Bermudian (or spouse of a Bermudian, or holder of a permanent resident's certificate, or holder of a working resident's certificate) is available who meets the minimum standards reasonably required by the employer. The current policy of the Bermuda government is to place a six-year term limit on individuals with work permits, subject to certain exemptions for key employees. There are employee protection laws and social security laws in Bermuda that will apply if we ever have employees based in Bermuda.

The Bermuda Insurance Act.    The Bermuda Insurance Act imposes on insurance companies certain solvency and liquidity standards; certain restrictions on the declaration and payment of dividends and distributions; certain restrictions on the reduction of statutory capital; and certain auditing and reporting requirements and also the need to have a principal representative and a principal office (as understood under the Bermuda Insurance Act) in Bermuda. Primus Re's principal representative is currently Marsh Management Services (Bermuda) Ltd. The Bermuda Insurance Act grants to the BMA the power to cancel licenses, supervise, investigate and intervene in the affairs of insurance companies and in certain circumstances share information with foreign regulators. The Bermuda Insurance Act distinguishes between insurers carrying on long-term business and insurers carrying on general business. There are four classifications of insurers carrying on general business, with Class 4 insurers subject to the strictest regulation and Class 3 insurers subject to the next strictest regulation. Primus Re is registered as a Class 3 insurer and is regulated as such under the Bermuda

46




Insurance Act. Class 3 Insurers are authorized to carry on general insurance business (as understood under the Bermuda Insurance Act), subject to conditions attached to their license and to compliance with minimum capital and surplus requirements, solvency margin, liquidity ratios and other requirements imposed by the Bermuda Insurance Act.

As a Class 3 insurer: (1) Primus Re is required to maintain the general business solvency margin which is a minimum solvency margin equal to the greatest of: (A) $1,000,000; (B) 20% of net premiums written up to $6,000,000 plus 15% of net premiums written over $6,000,000; or (C) 15% of loss and other insurance reserves; (2) at any time Primus Re fails to meet its general business solvency margin it must, within 30 days after becoming aware of that failure or having reason to believe that such failure has occurred, file with the BMA a written report containing particulars of the circumstances leading to the failure and of the manner and time within which it intends to rectify the failure; (3) Primus Re is prohibited from declaring or paying any dividends at any time it is in breach of its general business solvency margin or the required minimum liquidity ratio, or if the declaration or payment of such dividends would cause it to fail to meet such margin or ratio, and if it has failed to meet its minimum solvency margin or minimum liquidity ratio on the last day of any financial year, Primus Re will be prohibited, without the approval of the BMA, from declaring or paying any dividends during the next financial year; and (4) Primus Re is prohibited, without the prior approval of the BMA, from reducing by 15% or more its total statutory capital (which includes contributed surplus, paid in capital and share premium) as set out in its previous year's financial statements. Primus Re is required annually to file statutorily mandated financial statements and returns, audited by an independent auditor approved by the BMA, together with an annual loss reserve opinion of a BMA approved loss reserve specialist.

Primus Re, Ltd. Act 2000.    Primus Re has obtained private Bermuda legislation, entitled the "Primus Re, Ltd. Act 2000", or Private Act, from the Bermuda Legislature that enables it to operate separate accounts (as defined in the Private Act), subject to the provisions of the Private Act. The expected result is that the assets of one separate account are protected from the liabilities of other accounts, with the result that only the assets of a particular separate account may be applied to the liabilities of that separate account. Pursuant to the Private Act, the assets and liabilities of a separate account are treated as a separate fund from Primus Re's own general assets and liabilities or the assets and liabilities arising from any other separate accounts, and, in an insolvency proceeding pursuant to Bermuda law, it is expected that a liquidator will be bound to respect the sanctity of such separate accounts. There are no Bermuda court decisions on the efficacy of separate accounts.

Competition

The business of selling credit protection in the form of credit swaps is highly competitive. Competition is based on many factors, including the general reputation, service and perceived financial strength of the protection seller, the pricing of the credit swap protection (i.e., the premium to be paid by the protection buyer for the credit swap) and other terms and conditions of the credit swap. While there are many participants in the credit swap industry, we believe that Primus Financial is well-positioned as a AAA/Aaa rated (S&P/Moody's) company dedicated to providing credit swap protection to credit swap dealers and credit portfolio managers. Unlike other participants in the credit swap market, our business model is based on the persistent differential between returns available from credit swap premiums and the underlying risk, combined with our efficient operating and capital structure.

Credit Ratings

Ratings by independent agencies are an important factor in establishing the competitive position of counterparties in the credit swap market and are important to our ability to sell credit swaps. Rating organizations continually review the financial positions of counterparties in the credit swap market, including us. S&P maintains a letter scale rating system ranging from "AAA" ("extremely strong") to "C" ("lowest rated"). Moody's maintains a letter scale rating system ranging from "Aaa" ("exceptional") to "C" ("lowest rated"). Primus Financial has been rated "AAA" ("extremely strong")

47




by S&P, which is the highest of eighteen rating levels, and "Aaa" ("exceptional") by Moody's, which is the highest of twenty-one rating levels. The objective of S&P's and Moody's rating systems is to assist counterparties by providing an opinion of a counterparty's financial strength and ability to meet ongoing obligations to its counterparties. These ratings reflect S&P's and Moody's opinions of our ability to pay a counterparty upon a credit event and are not applicable to the shares offered in this prospectus and are not a recommendation to buy, sell or hold our common shares. These ratings are subject to periodic review by, and may be revised downward or revoked at the sole discretion of, S&P and Moody's.

Credit Swap Documentation

The overall trading relationship between parties to a credit swap is typically governed by a master agreement, or ISDA Master Agreement, published by ISDA that sets the general and ongoing legal and credit terms between the parties and contains express provisions for netting of payment obligations. One of the principal benefits of using ISDA documentation is the ease of completing individual credit swaps with counterparties.

The ISDA Master Agreement consists of a printed form that includes typical contract terms such as representations and warranties, covenants, events of default and remedies after default and a schedule of elections and modifications to the printed form. The ISDA Master Agreement is designed to allow Primus Financial and a counterparty to document all of their credit swap transactions under a single agreement.

Individual credit swap transactions are documented under separate confirmations that set forth the particular terms of such transaction. Each confirmation supplements and is subject to the ISDA Master Agreement.

Employees

As of December 31, 2003, we had 29 employees. None of our employees is party to a collective bargaining agreement or represented by any labor organization. We consider our relations with our employees to be good.

Properties

Primus Financial occupies approximately 10,000 square feet in New York, New York under a lease that expires in 2012. Primus Financial intends to occupy in the near future an additional 2,000 square feet that is contiguous to its existing space. We believe our space is adequate for our current needs and that suitable additional or substitute space (including the additional contiguous space) will be available to accommodate foreseeable expansion of our operations.

Legal Proceedings

We are not party to nor currently aware of any pending or threatened litigation.

48




MANAGEMENT

Directors, Executive Officers and Other Key Employees

The following table sets forth information for each of our officers and directors as of April 19, 2004.


Name Age Position
Executive Officers        
Thomas W. Jasper   55   Chief Executive Officer and Director
Richard Claiden   52   Chief Financial Officer
Zachary Snow   52   General Counsel
         
Other Key Employees        
Candace Lau-Hansen   40   Global Head of Marketing
Alec C. Rainsby   42   Chief Technology and Operations Officer
Hilmar Schaumann   41   Chief Trading and Investment Officer
Charles Truett   59   Chief Risk Officer
         
Directors        
Michael P. Esposito, Jr.   64   Chairman of the Board of Directors
Frank P. Filipps   56   Director
Thomas J. Hartlage   52   Director
Robert R. Lusardi   47   Director
Jay H. Shidler   58   Director

Thomas W. Jasper has been our Chief Executive Officer since March 2001 and a director since March 2002. Mr. Jasper joined our company in October 1999 as a consultant to assist us in our formation. Prior to joining our company, Mr. Jasper served for 17 years as a key executive of Salomon Brothers Inc and its successor, Salomon Smith Barney Holdings, Inc. In 1982, Mr. Jasper created Salomon's interest rate swap business. While at Salomon, in 1984 Mr. Jasper co-founded ISDA, served as its first Co-Chairman, and worked to establish ISDA as the world's preeminent swap association. Mr. Jasper became the Chief Operating Officer of Salomon's non-Japan Asian business in 1994. In 1997, after the acquisition of Salomon Brothers Inc. by The Travelers Group, Inc., Mr. Jasper created the Global Treasury business plan and structure for the merged firm. Mr. Jasper continued as the Global Treasurer of Salomon Smith Barney until late 1998. Mr. Jasper serves on the boards of directors of Phoenix House Foundation, the Wellspring Foundation and the Drucker School of Management at Claremont Graduate University. Mr. Jasper holds a Bachelor of Arts degree from Southern Methodist University and an M.B.A. from the University of Texas.

Richard Claiden has been our Chief Financial Officer since October 2003. Prior to joining our company, from 2000 to 2003, Mr. Claiden was a Managing Director and from 2001 to 2003 Head of Operational Risk at the investment banking division of JPMorgan Chase. From 1994 to 1999, Mr. Claiden held numerous executive positions at the Canadian Imperial Bank of Commerce. Mr. Claiden holds a Bachelor of Science degree in Economics from London University and holds a Master of Arts in Accounting and Finance from Lancaster University. He is a fellow of the Institute of Chartered Accountants (U.K.).

Zachary Snow has been our General Counsel since May 2002. Prior to joining our company, Mr. Snow served for three years as Executive Vice President and General Counsel of Bridge Information Systems, a leading provider of financial market information. In 2001, he assumed global responsibility for human resources and corporate communications and was named co-Chief Executive Officer in connection with Bridge Information System's reorganization proceeding under Chapter 11. He also served as interim President and Chief Executive Officer of the Bridge Information System's broker-dealer and related subsidiaries. Prior to that, Mr. Snow served nineteen years (1979-99) in the legal department of Salomon Brothers Inc and its successor, Salomon Smith Barney, Inc., becoming a

49




managing director in 1990 and head of the United States legal department in 1993. While employed by Salomon, Mr. Snow served as Chairman of the Fixed Income Committee of the National Association of Securities Dealers Regulation, Inc. and of the Derivative Products Committee of the Securities Industry Association. Mr. Snow has served as Chairman of the Board of Directors of Corlears School and of the Battery Dance Company. Mr. Snow holds a Bachelor of Arts degree from Princeton University and a J.D. from Harvard Law School.

Candace Lau-Hansen has been our Global Head of Marketing since January 2003. Prior to joining our company, Ms. Lau-Hansen spent eleven years at JPMorgan Chase, where she was a Managing Director in the Structured Credit Products and Financial Institutions Groups. From 2000 to 2001, Ms. Lau-Hansen was Global Head of Reinsurance Sales, managing a global team of structured credit sales people covering the reinsurance industry. Prior to that position, from 1996 to 2001, she was the North America/Bermuda Reinsurance Team Leader within JPMorgan Chase's Financial Institutions Group. From 1992 through 1996, Ms. Lau-Hansen managed the Chase Manhattan Bank's relationships with insurance companies in the Northeast United States. Ms. Lau-Hansen holds a Bachelor of Arts degree from Yale University.

Alec C. Rainsby has been our Chief Technology and Operations Officer since March 2002 and has been Chief Technology Officer since March 2000. Prior to joining our company, from June 1993 to March 2000, Mr. Rainsby was a Managing Director in the Debt Markets Technology group of Merrill Lynch. In 1998, Mr. Rainsby created a technology strategy and implementation plan for the Global Debt Markets business and went on to develop a technical architecture group and operating model. During his tenure at Merrill Lynch, Mr. Rainsby managed over 80 professionals, with responsibility for application development, maintenance, hotline support and database administration. Prior to Merrill Lynch, Mr. Rainsby worked at Prudential Securities from 1987 to 1993 where he served in the Financial Strategies Group dealing primarily with mortgage and asset backed securities. Mr. Rainsby holds a Bachelor of Science degree in management science from the London School of Economics.

Hilmar Schaumann has been our Chief Trading and Investment Officer since May 2002. Prior to joining our company, Mr. Schaumann held positions in the global derivatives markets with Deutsche Bank and Swiss Re Financial Products Corporation for 12 years. As a Director at Swiss Re Financial Products in New York, Mr. Schaumann established the firm's credit derivatives trading and structuring. At Deutsche Bank, where he worked in its London and Frankfurt offices, Mr. Schaumann traded fixed income products on an arbitrage basis and structured derivatives solutions for clients, which included the development of exotic derivatives. Mr. Schaumann has been involved with the ISDA Credit Derivatives Market Practice Committee and was a member of the first "Group of Six" that drafted the Modified Restructuring definition. Mr. Schaumann holds a Master of Science in Mathematics from the University of Hannover. He also attended the Program for Management Development at Harvard Business School.

Charles Truett has been our Chief Risk Officer since August 2001. Prior to joining our company, Mr. Truett spent 31 years with Bank of America and Continental Bank. From 1994 to 1998, Mr. Truett was Bank of America's Senior Credit Officer for its derivatives and securities businesses throughout North and South America and, during this time, also served as Chief Credit Officer and member of the Board of Directors of BA Securities, Inc. From 1998 to 2000, Mr. Truett was the Senior Credit Officer for Latin America at Bank of America during which he developed and implemented credit systems to automate the credit approval and file processes. From 2000 to May 2001, Mr. Truett was based in Hong Kong as Bank of America's Senior Risk Management executive for Asia. Mr. Truett holds a Bachelor of Science degree in management science from the Case Institute of Technology and holds an M.B.A. from the University of Chicago.

Michael P. Esposito, Jr. has been the Chairman of our Board of Directors since March 2002. He has been non-executive Chairman of the Board of Directors of XL Capital Ltd (NYSE: XL), a provider of insurance and reinsurance coverage and financial products and services, since 1995 and a director since 1986. He is also a director of the general partner of XL Capital Principal Partners I, L.L.C. Since 1995 he has served as a director of Forest City Enterprises, Inc. (NYSE: FCY), a real estate development and management firm and since 1997 as a director of Annuity and Life Re

50




(Holdings), Ltd. (NYSE: ANR), an insurance company. Mr. Esposito served as Co-Chairman of the Board of Directors of Inter-Atlantic Capital Partners, Inc., an investment banking firm, from 1998 to 2000, having previously served as Vice Chairman from 1994 to 1998. Mr. Esposito served as Executive Vice President and Chief Corporate Compliance, Control and Administration Officer of The Chase Manhattan Corporation from 1992 to 1995, having previously served as Executive Vice President and Chief Financial Officer from 1987 to 1992.

Frank P. Filipps has been a director of our company since March 2002. In June 1999, he was elected Chairman and Chief Executive Officer of Radian Group Inc. (NYSE: RDN) and its principal subsidiary, Radian Guaranty, Inc. (collectively, Radian Group), which were formed through a merger of Amerin and Commonwealth Mortgage Assurance Company, or CMAC. Radian Group provides private mortgage insurance coverage on residential mortgage loans. From January 1995 to June 1999, he served as Chairman, President and Chief Executive Officer of CMAC. In 1995, he was elected President and a Director of CMAC Investment Corporation (NYSE: CMT), and in January 1996, he was elected Chief Executive Officer of CMAC Investment Corporation. Mr. Filipps originally joined CMAC in 1992 as Senior Vice President and Chief Financial Officer and became Executive Vice President and Chief Operating Officer in 1994. He has been a director of Impac Mortgage Holdings, Inc. (NYSE: IMH), a mortgage real estate investment trust, since November 1995. He has been a director of Radian Group since May 1995.

Thomas J. Hartlage has been a director of our company since March 2002. Since 1990, Mr. Hartlage has been employed in a variety of capacities at subsidiaries of AEGON N.V. (NYSE: AEG), an insurance company, including having responsibilities for strategic planning and product and market development. Since 2001, he has been president of AEGON Structured Products, Inc., a unit of AEGON Institutional Markets focused on building and developing structured transaction business in the capital markets sector. Mr. Hartlage has more than 25 years of experience in the financial services sector. Mr. Hartlage is a chartered financial analyst (CFA).

Robert R. Lusardi has been a director of our company since March 2002. Since July 2000, he has served as Chief Executive for Financial Products and Services of XL Capital Ltd (NYSE: XL), a provider of insurance and reinsurance coverage and financial products and services. From February 1998 until July 2001, he also served as Chief Financial Officer of XL. Mr. Lusardi has been an Executive Vice President of XL since 1998 and serves as a director and/or officer of a number of XL entities, including the general partner of XL Capital Principal Partners I, L.L.C. From 1980 until 1998, Mr. Lusardi was an investment banker at Lehman Brothers where he ultimately served as a Managing Director and headed the insurance and asset management investment banking practice. He is Chairman of the Board of Directors of Pareto Partners, a London-based investment management concern. He is also a Director of FSA International Ltd., a financial guaranty company. Mr. Lusardi holds a Bachelor of Arts, Master of Arts degree in Engineering and Economics from Oxford University and an M.B.A. from Harvard University.

Jay H. Shidler is the founder and former Chairman of the Board of our company. Mr. Shidler has been a director of our company since its formation in June 1998. He is the founder and managing partner of The Shidler Group, a private firm investing in the start-up and early stage funding of companies in the finance, insurance, and real estate industries. A nationally acknowledged expert in the field of real estate investment and finance, Mr. Shidler is the founder and Chairman of the Board of Directors of Corporate Office Properties Trust (NYSE: OFC) and founder and Chairman of the Board of First Industrial Realty Trust (NYSE: FR). He serves on the boards of directors of several private companies and charitable organizations, including The Shidler Family Foundation.

The following individuals will become directors of Primus Guaranty upon completion of this offering:

James K. Hunt will become a director of our company upon the closing of this offering. Since April 2004, Mr. Hunt has been the Chief Executive Officer, Chief Investment Officer and a director of Evercore Investment Corporation, a newly-organized, closed-end, management investment company. From 2001 to 2003, Mr. Hunt was engaged in fund-raising efforts for Bison Capital Asset Management, LLC, a private equity firm. Mr. Hunt founded and has been Managing Partner of Bison

51




Capital since 2001. From 2001 to 2002, Mr. Hunt also served as an outside consultant to SunAmerica Investments, Inc., a company specializing in retirement savings solutions. From 1990 to 2000, he was employed by SunAmerica Inc. where he became President of SunAmerica Corporate Finance and Executive Vice President of SunAmerica Investments, Inc., which subsequently became a unit of AIG SunAmerica. During his tenure at SunAmerica, he was also President and Chief Executive Officer of the Anchor Pathway Funds and SunAmerica Series Trust with assets exceeding $26 billion. Mr. Hunt serves on the board of directors of Falcon Financial Investment Trust (Nasdaq: FLCN), a specialty finance company focused solely on the business of originating and servicing loans to automotive dealers in the United States. Since March 2002, Mr. Hunt has served as a director of Primus Financial. Mr. Hunt holds a Bachelor of Business Administration degree in economics from the University of Texas at El Paso and an M.B.A. in finance and accounting from the University of Pennsylvania's Wharton Graduate School of Business.

John A. Ward will become a director of our company upon the closing of this offering. Mr. Ward was the Chairman of the Board of Directors and Chief Executive Officer of American Express Bank from January 1996 until September 2000, and President of Travelers Cheque Group from April 1997 until September 2000. Mr. Ward joined American Express following a 27-year career at Chase Manhattan Bank, during which he held various senior posts in the United States, Europe and Japan. His last position at Chase was that of Chief Executive Officer of ChaseBankCard Services, which he held from 1993 until 1995. Presently, Mr. Ward serves as a director of Rewards Network Inc. (AMEX: IRN), a loyalty and rewards marketing company, and Coactive Marketing Group, Inc. (NasdaqSC: CMKG), a marketing, sales promotion and interactive media services and e-commerce provider company. Since March 2002, Mr. Ward has served as a director of Primus Financial.

Board Composition

Our board of directors consists of eight members. We intend to add up to two additional non-management directors following completion of this offering. Our Bye-laws provide for a staggered board of directors.

Directors are elected for three-year terms as follows:

•  Messrs.             ,             and              have been designated Class I directors whose terms will expire at the 2007 annual meeting of shareholders;
•  Messrs.             ,              and              have been designated Class II directors whose terms will expire at the 2006 annual meeting of shareholders; and
•  Messrs.             ,              and              have been designated Class III directors whose terms will expire at the 2005 annual meeting of shareholders.

In addition, in order to ensure compliance with the independence requirements of the NYSE, the composition of the board of directors may change prior to and following the offering. It is our intention to be in full and timely compliance with all applicable rules of the NYSE and applicable law, including with respect to the independence of our directors. We intend to comply with the requirements of the Sarbanes-Oxley Act of 2002 and the NYSE rules which require that our audit committee be composed of at least three independent directors.

Committees of the Board of Directors

Our board of directors has the power to appoint committees to perform certain management and administration functions. Our board of directors currently has an audit committee, a compensation committee and a finance and investment committee. We believe that the members of the audit and compensation committees are, and the nominating and corporate governance committee that we intend to establish prior to the closing of this offering will be, "independent" directors under the standards applicable to members of those committees imposed by SEC regulations for audit committees and the NYSE's listing standards for audit, compensation and nominating/corporate governance committees.

52




Audit Committee.

The audit committee, on behalf of our board of directors, recommends to the shareholders the appointment and termination of an independent public accounting firm to be engaged to audit our financial statements, discusses with the independent auditors their independence, reviews and discusses the audited financial statements with the independent auditors and management and recommends to our board of directors whether the audited financials should be included in our future Annual Reports on Form 10-K to be filed with the SEC. The audit committee will consist of three members, all of whom will be independent directors within one year following the consummation of this offering. We anticipate that Messrs. Hartlage and Ward as well as another independent director will be members of this committee upon completion of the offering.

Compensation Committee.

The compensation committee reviews and either approves, on behalf of our board of directors, or recommends to the board of directors for approval (1) the annual salaries and other compensation of our executive officers and (2) individual share and option grants. The compensation committee also provides assistance and recommendations with respect to our compensation policies and practices and assists with the administration of our compensation plans. We anticipate that Messrs. Esposito, Filipps and Hunt will be members of this committee upon completion of the offering.

Finance and Investment Committee.

The finance and investment committee reviews and either approves, on behalf of our board of directors, or recommends to the board of directors for approval, our capital management policies including reviewing and recommending actions with respect to strategic investments, new business initiatives, and reviewing our investment guidelines and performance. We anticipate that Messrs. Hunt, Lusardi and Shidler will be members of this committee upon completion of the offering.

Nominating and Corporate Governance Committee.

Prior to the closing of this offering, we will establish a Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee will be responsible for the oversight of and assist our board of directors in developing and recommending corporate governance practices and selecting the director nominees to stand for election at annual meetings of our shareholders. We anticipate that Messrs. Esposito and Filipps as well as another independent director will be members of this committee upon completion of the offering.

Compensation Committee Interlocks and Insider Participation

No interlocking relationship exists between our board of directors or compensation committee and the board of directors or compensation committee of any other entity, nor has any interlocking relationship existed in the past.

Compensation of Directors

For the year ended December 31, 2003, Messrs. Ward and Hunt received compensation of $31,000 and $30,000, respectively, for serving on the board of directors of Primus Financial and are reimbursed for reasonable expenses incurred in attending meetings of the board of directors of Primus Financial or such board's committees. For the year ended December 31, 2003, the other individuals serving on our board of directors who were not our employees did not receive any compensation so long as they were affiliated with, or had a financial interest in, us.

After completion of this offering, we intend to pay our non-employee directors an annual retainer fee to be determined prior to the consummation of the offering related to their service on our board of directors and an additional annual retainer fee for each committee on which they serve as a member to be determined prior to the consummation of the offering. Any non-employee director who

53




also serves as chairman of the board will receive an annual retainer fee in lieu of the foregoing retainers to be determined prior to the consummation of the offering. Non-employee directors may also be eligible to receive equity incentive awards.

We intend to reimburse promptly all directors for reasonable expenses incurred to attend meetings of our board of directors or committees.

Executive Compensation

The following table sets forth all compensation received for services rendered during the year ended December 31, 2003 by our chief executive officer and our two other executive officers whose total compensation exceeded $100,000 in such fiscal year. These three officers are referred to as the "named executive officers" in this prospectus. The compensation described in this table does not include medical, group life insurance or other benefits which are available generally to all of our salaried employees. The share numbers included in the following Summary Compensation Table do not reflect a reverse share split to be effected prior to the offering.

Summary Compensation Table


  Annual Compensation Long-Term Compensation  
        Awards Payouts  
Name and Principal Position Salary ($) Bonus ($) Other
Annual
Compensation
($)
Restricted
Share
Award(s)
($)(1)
Securities
Underlying
Options/
SARs (#)
LTIP
Payouts
($)
All Other
Compensation
($)
Thomas W. Jasper $ 450,000   $ 781,395       $ 358,605     490,000          
Chief Executive Officer
Richard Claiden   48,526     50,000         368,200 (2)    150,000          
Chief Financial Officer
Zachary Snow   316,667     325,500         139,500     200,000          
General Counsel
(1) There was no public trading market for our common shares as of the grant date of these awards. Accordingly, these values have been calculated on our board of directors' determination of the fair market value of the underlying shares as of the respective grant dates. The restricted share bonus awards granted for 2003, in the form of Restricted Share Units, vest in equal installments on the first three anniversary dates of the grant date, February 15, 2004.
(2) Includes a restricted share bonus award for 2003 and an award of 400,000 Restricted Share Units granted upon Mr. Claiden's employment date, October 23, 2003, which vests in equal installments on the first three anniversary dates of the grant date.

Option Grants in the Last Fiscal Year

The following table sets forth information regarding options we granted during the fiscal year ended December 31, 2003 to the named executive officers. Potential realizable values are net of exercise price before taxes, and are based on the assumption that our common shares appreciate at the annual rate shown, compounded annually, from the date of grant until the expiration of the ten-year term. These numbers are calculated based on SEC requirements and do not reflect our projection or estimate of future share price growth.

54





  Individual Grants
Name Number of
Securities
Underlying
Options
Granted (1)
Percent of Total
Options Granted
to Employees
During the Fiscal
Year Ended
December 31,
2003
Exercise
Price Per
Share
($/Sh)(1)
Expiration
Date
Potential Realizable Value
at Assumed Annual Rates
of Share Price Appreciation
for Option Term
5% ($) 10% ($)
Thomas W. Jasper   490,000     19.0 $ 1.22     2/15/14   $ 377,300   $ 950,600  
Richard Claiden   150,000     5.8   1.22     2/15/14     115,500     291,000  
Zachary Snow   200,000