10-Q 1 file001.htm FORM 10-Q Table of Contents

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

FORM 10-Q

(Mark One)

[X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2006

or

[    ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from                      to                     .

Commission File Number: 001-32307

Primus Guaranty, Ltd.
(Exact name of registrant as specified in its charter)


Bermuda Not Required
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)

Clarendon House
2 Church Street
Hamilton HM 11, Bermuda
(Address of principal executive offices, including zip code)

441-296-0519
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   [X]    No   [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act). (Check one):

Large accelerated filer   [ ]            Accelerated filer   [X]            Non-accelerated filer   [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   [ ]    No   [X]

As of May 1, 2006, the number of shares outstanding of the issuer's common stock, $0.08 par value, was 43,285,017.




Primus Guaranty, Ltd.
Form 10-Q
For the three months ended March 31, 2006

INDEX


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Part I.     Financial Information
Item 1.    Financial Statements

Primus Guaranty, Ltd.
Condensed Consolidated Statements of Financial Condition
(in thousands except per share amounts)


  March 31,
2006
December 31,
2005
  (unaudited)
Assets            
Cash and cash equivalents $ 64,884   $ 69,355  
Available-for-sale investments   569,981     560,147  
Accrued interest receivable   5,281     5,127  
Accrued premiums and premiums receivable on credit swaps   3,562     3,461  
Premiums receivable on financial guarantees   300     300  
Unrealized gain on credit swaps, at fair value   47,556     25,342  
Fixed assets and software costs, net   5,421     4,993  
Debt issuance costs, net   3,117     3,147  
Other assets   931     1,210  
Total assets $ 701,033   $ 673,082  
Liabilities and stockholders’ equity            
Accounts payable and accrued expenses $ 1,772   $ 3,035  
Compensation payable   1,627     4,833  
Interest payable   564     404  
Accrued premiums on credit swaps   19      
Taxes payable   65     54  
Unrealized loss on credit swaps, at fair value   1,403     3,521  
Deferred credit swap premiums   40     46  
Deferred financial guarantee premiums   300     401  
Deferred rent payable   466     416  
Long-term debt   200,000     200,000  
Total liabilities   206,256     212,710  
Preferred securities of subsidiary   98,521     98,521  
Stockholders’ equity:            
Common stock, $0.08 par value, 62,500,000 shares authorized, 43,283,001 and 43,176,511 shares issued and outstanding at March 31, 2006 and December 31, 2005   3,572     3,572  
Additional paid-in-capital   266,593     265,848  
Warrants   612     612  
Accumulated other comprehensive loss   (5,699   (4,254
Retained earnings   131,178     96,073  
Total stockholders’ equity   396,256     361,851  
Total liabilities, preferred securities of subsidiary and stockholders’ equity $ 701,033   $ 673,082  

See accompanying notes.

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


  Three months ended March 31,
  2006 2005
  (unaudited)
Revenues            
Net credit swap revenue $ 40,129   $ (8,198
Premiums earned on financial guarantees   100     99  
Asset management fees   49     42  
Interest income   6,601     3,693  
Foreign currency revaluation loss   (6   (564
Total net revenues   46,873     (4,928
             
Expenses            
Compensation and employee benefits   4,891     5,196  
Professional and legal fees   1,215     954  
Depreciation and amortization   589     516  
Technology and data   399     317  
Interest expense   2,449     493  
Other   1,039     765  
Total expenses   10,582     8,241  
Distributions on preferred securities of subsidiary   1,131     649  
Income (loss) before provision for income taxes   35,160     (13,818
Provision for income taxes   (55   (36
Net income (loss) available to common shares $ 35,105     (13,854
             
Income (loss) per common share:            
Basic $ 0.81   $ (0.32
Diluted $ 0.79   $ (0.32
Average common shares outstanding:            
Basic   43,246     43,213  
Diluted   44,287     43,213  

See accompanying notes.

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Primus Guaranty, Ltd.
Condensed Consolidated Statements of Cash Flows
(in thousands except per share amounts)


  Three months ended March 31,
  2006 2005
  (unaudited)
Cash flows from operating activities            
Net income (loss) $ 35,105   $ (13,854
Adjustments to reconcile net income (loss) to net cash provided by operating activities:            
Non-cash items included in net income (loss):            
Depreciation and amortization   589     516  
Stock compensation   1,046     982  
Net unrealized (gain) loss on credit swap portfolio   (24,332   19,533  
Net amortization of premium and discount on securities   (904    
Deferred rent   50     (5
Amortization of debt issuance costs   43     12  
Distributions on preferred securities of subsidiary   1,131     649  
Increase (decrease) in cash resulting from changes in:            
Accrued interest receivable   (154   (747
Accrued premiums and premiums receivable on credit swaps   (101   198  
Premiums receivable on financial guarantees       100  
Other assets   279     137  
Accounts payable and accrued expenses   (1,263   789  
Compensation payable   (3,206   (3,862
Interest payable   160     (11
Accrued premiums payable on credit swaps   19      
Taxes payable.   11     35  
Deferred credit swap premiums   (6   (6
Deferred financial guarantee premiums   (101   (98
Net cash provided by operating activities   8,366     4,368  
Cash flows from investing activities            
Fixed asset purchases and capitalized software costs.   (1,017   (176
Purchases of available-for-sale investments.   (10,375    
Maturities and sales of available-for-sale investments.       27,496  
Net cash provided by (used in) investing activities   (11,392   27,320  
Cash flows from financing activities            
Repurchase and retirement of common stock   (507   (2,397
Proceeds from exercise of stock options and issue of stock   206     27  
Debt issuance costs   (13   (31
Net preferred distributions of subsidiary   (1,131   (649
Net cash used in financing activities   (1,445   (3,050
Net increase (decrease) in cash   (4,471   28,638  
Cash and cash equivalents at beginning of period   69,355     320,989  
Cash and cash equivalents at end of period $ 64,884   $ 349,627  
Supplemental disclosures            
Cash paid for interest $ 2,246   $ 493  
Cash paid for taxes $ 44   $  

See accompanying notes.

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1.    Organization and Basis of Presentation

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

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

In July 2005, PRS Trading Strategies, LLC (PRS Trading), a Delaware limited liability company, was formed. Primus Guaranty is the 100% owner of PRS Trading. PRS Trading engages in the relative value and other strategies involving buying and selling of credit swaps. PRS Trading engages primarily in relative value investing across credits, curves and instruments. These investments generally have a short-term investment horizon and are governed by tight risk controls and liquidity management. PRS Trading commenced operations in January 2006.

In November 2005, Primus Guaranty (UK), Ltd (PGUK) was incorporated in England to expand the Company’s presence and further develop its business and relationships across Europe. Primus Bermuda is the 100% owner of PGUK.

The accompanying unaudited condensed consolidated financial statements of Primus Guaranty, Ltd. have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for any other interim period or for the year ended December 31, 2006. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances have been eliminated.

The condensed consolidated financial statements represent a single reportable segment, as defined in Statement of Financial Accounting Standards (‘‘SFAS’’) No. 131, Disclosures about Segments of an Enterprise and Related Information.

The condensed consolidated financial statements are presented in U.S. dollar equivalents. At March 31, 2006 and December 31, 2005, the Company’s credit swap activities were conducted in U.S. dollars and euros.

Certain prior year amounts have been reclassified to conform to current year presentation.

2.    Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (‘FASB’) issued SFAS No. 123 (R), Share-Based Payment. SFAS No. 123 (R) is a revision of SFAS No. 123 and supersedes

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Accounting Principles Board (‘‘APB’’) Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123 (R) eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25 and requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements using a fair value-based method. In April 2005, the Securities and Exchange Commission (‘‘SEC’’) amended the effective date of SFAS No. 123 (R) until the first fiscal year beginning after June 15, 2005 to provide additional time for companies to comply with the reporting requirements. Effective January 1, 2006, the Company adopted SFAS No. 123 (R). See note 6 of notes to consolidated financial statements for further detail.

In March 2005, the SEC staff issued Staff Accounting Bulletin No. 107 (‘‘SAB No. 107’’) to provide supplemental implementation guidance on SFAS No. 123 (R). The Company applied the relevant provisions of SAB No. 107 in its adoption of SFAS No. 123 (R).

In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3. This statement requires retrospective application to prior periods’ financial statements of changes in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company will apply SFAS 154 in future periods, if applicable.

In November 2005, the FASB issued FASB Staff Position FSP 115-1, The Meaning of Other-Than Temporary Impairment and Its Application to Certain Investments (FSP 115-1), which addresses the determination as to when an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in FSP 115-1 is required to be applied to reporting periods beginning after December 15, 2005. The adoption did not have any effect on the consolidated financial statements.

3.    Available-for-sale Investments

Available-for-sale investments included U.S. government agency obligations (including government-sponsored enterprises) rated AAA and Aaa by the respective rating agencies and commercial paper. Available-for-sale investments have original maturities or maturities at time of purchase greater than 90 days.

The following table summarizes the composition of the Company’s available-for-sale investments at March 31, 2006 and December 31, 2005 (in thousands):


  March 31, 2006
  Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
U.S government agency obligations $ 555,878   $   $ (5,686 $ 550,192  
Commercial paper   19,802         (13   19,789  
Total $ 575,680   $   $ (5,699 $ 569,981  

  December 31, 2005
  Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
U.S government agency obligations $ 544,824   $   $ (4,259 $ 540,565  
Commercial paper   19,577     5         19,582  
Total $ 564,401   $ 5   $ (4,259 $ 560,147  

The unrealized losses on the Company’s investments in U.S. government agency obligations were primarily the result of an increase in interest rates during the first quarter of 2006 and during the year of 2005. These securities have been in a loss position for less than 12 months. Because the decline in market value is attributable to changes in interest rates and not credit quality, and the Company has

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the ability and intent to hold these investments until a recovery of fair value, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2006 and December 31, 2005. These securities have maturities of less than 3 years.

4.    Net Credit Swap Revenues and Portfolio

Overview

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

Credit swaps are derivative transactions that obligate one party to the transaction (the ‘‘Seller’’) to pay an amount to the other party to the transaction (the ‘‘Buyer’’) should one of a specified group of events (‘‘Credit Events’’) be incurred by an unrelated third party or portfolio of third parties (the ‘‘Reference Entity’’) specified in the contract. The amount to be paid by the Seller will either be (a) the notional amount of the transaction, in exchange for which the Seller must be delivered a defined obligation of the Reference Entity (called physical settlement), or (b) the difference between the current market value of a defined obligation of the Reference Entity and the notional amount of the transaction (called cash settlement). In exchange for incurring the potential of a Credit Event-generated loss, the Seller will receive a fixed premium for the term of the contract (or until the occurrence of a Credit Event). The fixed premium is generally paid quarterly in arrears over the term of the transaction. Premiums are taken into income as they are earned over the life of the transaction. Accrued premiums on credit swaps represent premiums earned but not yet payable. Premiums receivable on credit swaps represents premiums that are both earned and payable. When Primus purchases credit protection from its counterparties, Primus pays premiums as a series of fixed cash flows. The premium expense is recognized ratably over the life of the transaction as a component of net credit swap revenue.

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

The primary risks inherent in the Company’s activities are (a) where Primus is a Seller that Reference Entities specified in its credit swap transactions will experience Credit Events that will require Primus Financial to make payments to the Buyers of the transactions. Credit Events may include any or all of the following: bankruptcy, failure to pay, repudiation or moratorium, and modified or original restructuring, (b) where Primus is a Buyer of a credit swap and a Credit Event occurs, the Seller fails to make payment to the Company, and (c) that Buyers of the transactions from Primus will default on their required premium payments. During the three months ended March 31, 2006 and 2005, none of these events have occurred.

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

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

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In accordance with accounting principles generally accepted in the United States, the Company carries its credit swaps on its condensed consolidated statements of financial condition at their fair value. Changes in the fair value of the Company’s credit swap portfolio are recorded as unrealized gains or losses as a component of net credit swap revenue in the Company’s consolidated statements of operations. If a credit swap has an increase in fair value during a period, the increase will add to the Company’s net credit swap revenues for that period. Conversely, if a credit swap has a decline in fair value during the period, the decline will subtract from the Company’s net credit swap revenues for that period. Changes in the fair value of the Company’s credit swap portfolio are a function of the notional amount and composition of the portfolio and prevailing market credit swap premiums for comparable credit swaps. The Company generally holds the credit swaps it sells to maturity, at which point, assuming no credit event has occurred, the cumulative unrealized gains and losses on each credit swap would equal zero.

In general, the Company aggregates fair values of individual credit swaps by counterparty for presentation on the Company’s condensed consolidated statements of financial condition. If the aggregate total of fair values with a counterparty is a net gain, the total is recorded as a component of unrealized gains on credit swaps, at fair value in the condensed consolidated statements of financial condition. If the aggregate total of fair values with a counterparty is a net loss, the total is recorded as a component of unrealized losses on credit swaps, at fair value in the condensed consolidated statements of financial condition. Aggregation by counterparty is applied where a valid ISDA master agreement is in place with the counterparty. In instances where the Company does not yet have a valid ISDA master agreement with the counterparty, the fair values of individual swap transactions are recorded as components of unrealized gains or losses on credit swaps, at fair value, dependent upon whether the individual contract was at a gain or a loss.

The Company’s portfolio of credit swaps is generally held by Primus Financial and PRS Trading.

Primus Financial

Under the terms of Primus Financial’s operating guidelines, derivatives transactions can only include credit swaps.

Primus Financial is primarily a Seller of credit swaps, although it may also buy credit swaps to off-set the risks it has incurred as a Seller. Credit swaps purchased to off-set risks do not qualify as hedges in accordance with SFAS No. 133. As a general rule, when Primus Financial sells credit protection, it intends to maintain the transaction until maturity. However, there are two sets of circumstances in which the Company could elect to terminate transactions prior to maturity, and the Company monitors its portfolio on a continuing basis to assess whether those circumstances are present.

First, whenever Primus Financial receives new information suggesting that the credit quality of the underlying risk has deteriorated to a material degree, the Company considers the possibility of terminating the transaction, usually at a loss, to avoid the larger loss that could result if the credit swap were to remain in place until a credit event occurs.

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

Primus Financial distinguishes among credit swaps sold-single name, credit swaps sold-tranche, credit swaps purchased as short-term investments and credit swaps purchased to offset the credit risk on credit swaps previously sold. Credit swaps sold-single name refers to credit protection referencing a single entity. Credit swaps sold-tranche refers to credit protection referencing portfolios containing obligations of multiple reference entities, which Primus Financial began selling during the second quarter of 2005.

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PRS Trading

PRS Trading sells and buys protection through credit default swaps in pursuit of investment returns.

Credit swaps purchased to off-set risks do not qualify as hedges in accordance with SFAS No. 133. The Company’s board limits the amount of credit swaps sold and purchased in accordance with a set of pre-established risk limits.

Revenue and Portfolio Information

The tables below present the components of consolidated net credit swap revenues for the three months ended March 31, 2006 and 2005 (in thousands).


  Three months ended
March 31,
  2006 2005
Net premium income $ 15,943   $ 11,202  
Realized gains   658     140  
Realized losses   (804   (7
Change in unrealized gains (losses)   24,332     (19,533
Total net credit swap revenue $ 40,129   $ (8,198

The Company’s consolidated notional amount, fair value and average fair value of open credit swap transactions entered into with third parties at March 31, 2006 and December 31, 2005 are as follows (in thousands):


  March 31,
2006
December 31,
2005
Gross Notional Amounts:            
Credit swaps sold-single name $ 14,479,763   $ 13,374,031  
Credit swaps sold-tranche   150,000     50,000  
Credit swaps purchased   (119,000    
Fair value:            
Asset   47,556     25,342  
Liability   1,403     3,521  
Average fair value:            
Asset   38,144     28,140  
Liability   2,228     3,545  

‘‘Asset’’ in the table above represents unrealized gains on credit swaps while ‘‘Liability’’ represents unrealized losses on credit swaps. All credit swaps are subject to netting arrangements that have been contractually established independently by Primus Financial and PRS Trading with each counterparty under an ISDA Master Agreement. The notional amounts of the credit swap contracts in the preceding table are presented on a gross basis and the fair values of such contracts are netted by counterparty.

At March 31, 2006 and December 31, 2005, Primus Financial had three derivative transactions with its affiliate, Primus Re, totaling $87 million in notional principal which are eliminated in consolidation.

The tables that follow summarize, by credit rating of Reference Entities and of Counterparties, the notional amounts and fair values of credit swap transactions outstanding (excluding transactions with affiliates) for the Company as of March 31, 2006 and December 31, 2005 (in thousands).

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(in thousands)


  March 31, 2006 December 31, 2005
Moody’s Rating Category Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Reference Entity/Tranche                        
Credit Swaps Sold – Single Name:                        
Aaa $ 632,413   $ 1,094   $ 561,472   $ 1,118  
Aa   2,434,751     8,062     2,268,090     8,006  
A   5,898,190     21,245     5,270,706     15,008  
Baa   5,172,618     21,293     5,041,442     4,328  
Ba   290,791     (4,420   199,321     (5,785
B   51,000     (970   33,000     (1,539
Total $ 14,479,763   $ 46,304   $ 13,374,031   $ 21,136  
Credit Swaps Sold – Tranche:                        
Aa $ 150,000   $ 146   $ 50,000   $ 685  
Total $ 150,000   $ 146   $ 50,000   $ 685  
Credit Swaps Purchased                        
A $ (45,000 $ (138 $   $  
Baa   (74,000   (159        
Total $ (119,000 $ (297 $   $  
Counterparty Buyer                        
Credit Swaps Sold – Single Name:                        
Aaa $ 5,000   $ 34   $ 5,000   $ 37  
Aa   12,176,610     36,595     11,228,563     13,341  
A   2,298,153     9,675     2,140,468     7,758  
Total $ 14,479,763   $ 46,304   $ 13,374,031   $ 21,136  
Credit Swaps Sold – Tranche:                        
Aa $ 150,000   $ 146   $ 50,000   $ 685  
Total $ 150,000   $ 146   $ 50,000   $ 685  
Counterparty Seller                        
Credit Swaps Purchased:                        
Aa $ (119,000 $ (297 $   $  
Total $ (119,000 $ (297 $   $  

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(in thousands)


  March 31, 2006 December 31, 2005
S&P Rating Category Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Reference Entity/Tranche                        
Credit Swaps Sold – Single Name:                        
AAA $ 712,413   $ 1,327   $ 636,472   $ 1,222  
AA   1,973,987     6,219     1,862,713     6,026  
A   6,697,602     24,287     6,143,717     17,753  
BBB   4,825,442     18,833     4,513,356     4,803  
BB   232,319     (3,150   197,773     (7,062
B   38,000     (1,212   20,000     (1,606
Total $ 14,479,763   $ 46,304   $ 13,374,031   $ 21,136  
Credit Swaps Sold – Tranche:                        
AA $ 150,000   $ 146   $ 50,000   $ 685  
Total $ 150,000   $ 146   $ 50,000   $ 685  
Credit Swaps Purchased:                        
A $ (30,000 $ (119 $   $  
BBB   (89,000   (178        
Total $ (119,000 $ (297 $   $  
Counterparty Buyer                        
Credit Swaps Sold – Single Name:                        
AAA $ 35,295   $ 8   $ 34,623   $ (57
AA   10,046,865     30,600     9,262,316     10,525  
A   4,397,603     15,696     4,077,092     10,668  
Total $ 14,479,763   $ 46,304   $ 13,374,031   $ 21,136  
Credit Swaps Sold – Tranche:                        
AA $ 150,000   $ 146   $ 50,000   $ 685  
Total $ 150,000   $ 146   $ 50,000   $ 685  
Counterparty Seller                        
Credit Swaps Purchased:                        
AA $ (84,000 $ (257 $   $  
A   (35,000   (40        
Total $ (119,000 $ (297 $   $  

Primus Financial’s and PRS Trading’s counterparties are generally financial institutions with whom it has entered into Master Agreements that consolidate the counterparty risk to one office of that counterparty. For the three months ended March 31, 2006 and 2005, respectively, two counterparties each generated greater than ten percent of the Company’s total premium revenue. At March 31, 2006, the notional and fair value amount of credit swaps outstanding with respect to one non-rated counterparty was $5.0 million and $35 thousand, respectively. The premiums on these transactions were fully prepaid by the counterparty, and as such, they have been categorized as triple A rating in our credit swap portfolio.

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The table below shows the geographical distribution of the Company’s credit swap portfolio (excluding transactions with affiliates) by domicile of the Reference Entity and domicile of the counterparty (in thousands):


  March 31, 2006 December 31, 2005
Country of Domicile Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Credit Swaps Sold – Single Name                        
By Reference Entity:                        
North America $ 8,748,295   $ 31,935   $ 8,243,123   $ 12,268  
Europe   5,082,468     13,050     4,561,908     7,412  
Pacific   510,000     1,062     445,000     992  
Others   139,000     257     124,000     464  
Total $ 14,479,763   $ 46,304   $ 13,374,031   $ 21,136  
By Counterparty:                        
North America $ 7,525,733   $ 22,795   $ 6,878,892   $ 8,754  
Europe   6,857,030     23,417     6,388,139     12,359  
Pacific   65,000     7     65,000     (37
Others   32,000     85     42,000     60  
Total $ 14,479,763   $ 46,304   $ 13,374,031   $ 21,136  
Credit Swaps Sold – Tranche                        
By Counterparty:                        
North America $ 50,000   $ 1,166   $ 50,000   $ 685  
Europe   100,000     (1,020        
Total $ 150,000   $ 146   $ 50,000   $ 685  
Credit Swaps Purchased                        
By Reference Entity:                        
North America $ (104,000 $ (277 $   $  
Others   (15,000   (20        
Total $ (119,000 $ (297 $   $  
By Counterparty:                        
North America $ (92,000 $ (244 $   $  
Europe   (27,000   (53        
Total $ (119,000 $ (297 $   $  

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The table below shows the distribution of the Company’s credit swap portfolio (excluding related party transactions) by year of maturity as of March 31, 2006 and December 31, 2005 (in thousands):


  March 31, 2006 December 31, 2005
  Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Credit Swaps Sold – Single Name                        
Year of Maturity                        
2006 $ 642,635   $ 392   $ 939,657   $ 588  
2007   2,486,416     12,488     2,469,188     12,637  
2008   1,123,734     8,283     1,129,811     7,948  
2009   2,691,937     12,328     2,684,704     5,980  
2010   6,130,877     12,337     6,122,897     (5,963
2011   1,404,164     476     27,774     (54
Total $ 14,479,763   $ 46,304   $ 13,374,031   $ 21,136  
Credit Swaps Sold – Tranche                        
Year of Maturity                        
2010 $ 50,000   $ 1,166   $ 50,000   $ 685  
2011   50,000     (149        
2012                
2013   50,000     (871        
Total $ 150,000   $ 146   $ 50,000   $ 685  
Credit Swaps Purchased                        
Year of Maturity                        
2011 $ (114,000 $ (228 $   $  
2012                
2013                
2014                
2015                
2016   (5,000   (69        
Total $ (119,000 $ (297 $   $  

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5.    Earnings per Share

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


  Three months ended
March 31,
  2006 2005
Net earnings (loss) available to common stockholders