10-Q 1 file1.htm FORM 10-Q

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, 2007

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, 2007, the number of shares outstanding of the issuer’s common stock, $0.08 par value, was 45,023,823.




Primus Guaranty, Ltd.
Form 10-Q
For the three months ended March 31, 2007

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,
2007
December 31,
2006
  (unaudited)  
Assets    
Cash and cash equivalents $ 155,212 $ 204,428
Available-for-sale investments 644,315 584,911
Trading account assets 12,952 14,537
Accrued interest receivable 6,120 6,374
Accrued premiums and receivables on credit and other swaps 4,409 4,022
Unrealized gain on credit and other swaps, at fair value 58,577 73,330
Deposit and warehouse loan agreements 5,089
Warehouse loans held for securitization 59,369
Fixed assets and software costs, net 5,360 5,510
Debt issuance costs, net 7,198 7,399
Other assets 4,390 1,957
Total assets $ 962,991 $ 902,468
Liabilities and shareholders’ equity    
Accounts payable and accrued expenses $ 4,312 $ 2,854
Accrued compensation 2,031 8,800
Interest payable 806 625
Unrealized loss on credit and other swaps, at fair value 11,026 2,931
Trading account liabilities 1,010 1,002
Warehouse loan payable 59,369
Long-term debt 324,513 325,000
Other liabilities 1,168 644
Total liabilities 404,235 341,856
Preferred securities of subsidiary 98,521 98,521
Shareholders’ equity    
Common shares, $0.08 par value, 62,500,000 shares authorized, 44,954,415 and 43,380,893 shares issued and outstanding at March 31, 2007 and December 31, 2006 3,583 3,470
Additional paid-in-capital 277,130 269,420
Warrants 612
Accumulated other comprehensive loss (1,724 )  (2,375 ) 
Retained earnings 181,246 190,964
Total shareholders’ equity 460,235 462,091
Total liabilities, preferred securities of subsidiary and shareholders’ equity $ 962,991 $ 902,468

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,
  2007 2006
  (unaudited)
Revenues    
Net credit swap revenue (loss) $ (4,877 )  $ 40,129
Premiums earned on financial guarantees 100
Asset management and advisory fees 661 49
Interest income 9,977 6,601
Other trading revenue 1,259
Foreign currency revaluation gain (loss) 51 (6 ) 
Total net revenues 7,071 46,873
Expenses    
Compensation and employee benefits 6,004 4,891
Professional and legal fees 976 1,215
Depreciation and amortization 577 589
Technology and data 877 399
Interest expense 4,862 2,449
Other 1,535 1,039
Total expenses 14,831 10,582
Distributions on preferred securities of subsidiary 1,902 1,131
Income (loss) before provision for income taxes (9,662 )  35,160
Provision for income taxes 56 55
Net income (loss) available to common shares $ (9,718 )  35,105
Income (loss) per common share:    
Basic $ (0.22 )  $ 0.81
Diluted $ (0.22 )  $ 0.79
Average common shares outstanding:    
Basic 44,164 43,246
Diluted 44,164 44,287

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,
  2007 2006
  (unaudited)
Cash flows from operating activities    
Net income (loss) $ (9,718 )  $ 35,105
Adjustments to reconcile net income (loss) to net cash provided by operating activities:    
Non-cash items included in net income (loss):    
Depreciation and amortization 577 589
Share compensation 1,007 1,046
Net unrealized (gain) loss on credit swap portfolio 22,848 (24,332 ) 
Net amortization of premium and discount on securities (2,223 )  (904 ) 
Amortization of debt issuance costs 78 43
Distributions on preferred securities of subsidiary 1,902 1,131
Increase (decrease) in cash resulting from changes in:    
Accrued interest receivable 254 (154 ) 
Accrued premiums and interest receivable on credit and other swaps (387 )  (101 ) 
Deposit and warehouse loan agreement (5,089 ) 
Warehouse loans held for securitization (59,369 ) 
Other assets (2,433 )  279
Trading account assets 1,585
Accounts payable and accrued expenses 1,581 (1,263 ) 
Accrued compensation (6,769 )  (3,206 ) 
Trading account liabilities 8
Interest payable 181 160
Other liabilities 37 (27 ) 
Net cash (used in) provided by operating activities (55,930 )  8,366
Cash flows from investing activities    
Fixed asset purchases and capitalized software costs (427 )  (1,017 ) 
Purchases of available-for-sale investments (267,249 )  (10,375 ) 
Maturities and sales of available-for-sale investments 210,714
Net cash used in investing activities (56,962 )  (11,392 ) 
Cash flows from financing activities    
Repurchase and retirement of common shares (1,131 )  (507 ) 
Proceeds from exercise of options and issue of shares 206
Proceeds from exercise of warrants 7,335
Warehouse loan payable 59,369  
Debt issuance costs (13 ) 
Net preferred distributions of subsidiary (1,902 )  (1,131 ) 
Net cash provided by (used in) financing activities 63,671 (1,445 ) 
Net effect of exchange rate changes on cash 5
Net decrease in cash (49,216 )  (4,471 ) 
Cash and cash equivalents at beginning of period 204,428 69,355
Cash and cash equivalents at end of period $ 155,212 $ 64,884
Supplemental disclosures    
Cash paid for interest $ 4,603 $ 2,246
Cash paid for taxes $ 11 $ 44

See accompanying notes.

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1.    Organization and Basis of Presentation

Primus Guaranty, Ltd., together with its consolidated subsidiaries (‘‘Primus Guaranty’’ or ‘‘the Company’’), is a Bermuda holding company that conducts business through several operating subsidiaries, including Primus Financial Products, LLC (‘‘Primus Financial’’), Primus Asset Management, Inc. (‘‘Primus Asset Management’’) and PRS Trading Strategies, LLC (‘‘PRS Trading Strategies’’).

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’’). Primus Financial is primarily a seller of credit swaps against investment grade credit obligations of corporate and sovereign reference entities. Primus Financial also sells credit swaps referencing portfolios containing obligations of multiple reference entities. Primus Financial recently received the rating agencies’ approval to sell credit swaps referencing residential mortgage-backed securities and commercial mortgage-backed securities, which are referred to as ABS. Primus Financial has begun selling credit swaps against ABS having an assigned rating of ‘‘BBB/Baa’’ (or the equivalent thereof) or better from a recognized rating agency, referencing residential mortgage-backed securities.

Primus Asset Management, a Delaware services company, acts as an investment manager to affiliated companies and third party entities. It currently manages the investment portfolios of its affiliates Primus Financial and PRS Trading Strategies, LLC (‘‘PRS Trading Strategies’’). In addition, Primus Asset Management manages three investment grade synthetic collateralized debt obligations, or synthetic CDO’s, on behalf of third parties. The synthetic CDO’s issue securities backed by one or more credit swaps sold against unaffiliated clients’ debt obligations. Primus Asset Management has commenced acting as asset manager with respect to collateralized loan obligation, or CLO, transactions. Primus Asset Management receives fees for its investment management services. Primus Asset Management’s business plan includes the expansion of its assets under management and coverage of additional financial products and asset classes including, among others, mortgage-backed and other asset-backed securities and speculative grade investments.

Primus Re, Ltd. (‘‘Primus Re’’), is a Bermuda company that operates as a financial guaranty insurance company and is licensed as a Class 3 Insurer under the Bermuda Insurance Act of 1978. 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.

PRS Trading Strategies commenced operations in January 2006 with $50 million of capital contributed by Primus Guaranty from the proceeds of our initial public offering. PRS Trading Strategies trades in a broad range of fixed income products, including credit default swaps, leveraged loans and investment grade and speculative grade securities. Unlike Primus Financial, PRS Trading Strategies has no counterparty ratings from rating agencies and, accordingly, may post collateral with its counterparties to support its contractual obligations. PRS Trading Strategies does not engage in trading activity with Primus Financial.

Primus Guaranty (UK), Ltd. (‘‘PGUK’’) was incorporated in England to expand the Company’s presence and further develop its business and relationships across Europe.

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, 2007. The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances have been eliminated.

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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, 2007 and December 31, 2006, 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 April 2006, the FASB issued FASB Staff Position FIN 46(R)-6, Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R) (‘‘FSP FIN 46(R)-6’’). FSP FIN 46(R)-6 addresses how variability should be considered when applying FIN 46(R). Variability affects the determination of whether an entity is a variable interest entity (VIE), which interests are variable interests, and which party, if any, is the primary beneficiary of the VIE required to consolidate. FSP FIN 46(R)-6 clarifies that the design of the entity also should be considered when identifying which interests are variable interests. The Company adopted FSP FIN 46(R)-6 during the third quarter of 2006 and applied it prospectively to all entities in which the Company first became involved with. The adoption of FSP FIN 46(R)-6 did not have a material effect on the Company’s consolidated financial statements.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. Effective January 1, 2007, the Company adopted FIN 48. The adoption did not have a material effect on the Company’s consolidated financial statements. See note 10 for further discussion.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact that adoption of SFAS No. 157 will have on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities (‘‘SFAS No. 159’’). SFAS No. 159 provides a fair value option election that allows companies to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities, with changes in fair value recognized in earnings as they occur. SFAS No. 159 permits the fair value option election on an instrument by instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently evaluating the impact that adoption of SFAS No. 159 will have on its 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, commercial paper rated A-1 and P-1 by the respective rating agencies and the Company’s equity investment in a CLO. Available-for-sale investments have original maturities or maturities at time of purchase greater than 90 days.

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The following table summarizes the composition of the Company’s available-for-sale investments at March 31, 2007 and December 31, 2006 (in thousands):


  March 31, 2007
  Amortized Unrealized Unrealized Estimated
  Cost Gains Losses Fair Value
U.S government agency obligations $ 613,482 $ 127 $ (1,673 )  $ 611,936
Commercial paper 25,979 4 25,983
Collateralized loan obligation (CLO) 6,786 (390 )  6,396
Total $ 646,247 $ 131 $ (2,063 )  $ 644,315

  December 31, 2006
  Amortized Unrealized Unrealized Estimated
  Cost Gains Losses Fair Value
U.S government agency obligations $ 554,691 $ 89 $ (2,551 )  $ 552,229
Commercial paper 26,275 1 26,276
Collateralized loan obligation (CLO) 6,536 (130 )  6,406
Total $ 587,502 $ 90 $ (2,681 )  $ 584,911

The following table summarizes the fair value of investments that have been in a continuous unrealized loss position for less than 12 months and for 12 months or more at March 31, 2007 and December 31, 2006 (in thousands):


  March 31, 2007
  Securities with Unrealized Losses
  Less than 12 months 12 months or more Total
  Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
U.S. government agency obligations $ 40,703 $ (26 )  $ 227,575 $ (1,647 )  $ 268,278 $ (1,673 ) 
Collateralized loan obligation (CLO) 6,396 (390 )  6,396 (390 ) 
Total $ 47,099 $ (416 )  $ 227,575 $ (1,647 )  $ 274,674 $ (2,063 ) 

  December 31, 2007
  Securities with Unrealized Losses
  Less than 12 months 12 months or more Total
  Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
U.S. government agency obligations $ 19,978 $ (90 )  $ 331,709 $ (2,461 )  $ 351,687 $ (2,551 ) 
Collateralized loan obligation (CLO) 6,406 (130 )  6,406 (130 ) 
Total $ 26,384 $ (220 )  $ 331,709 $ (2,461 )  $ 358,093 $ (2,681 ) 

The unrealized losses on the Company’s investments in U.S. government agency obligations were the result of an increase in short-term interest rates. Because the decline in market value is attributable to changes in interest rates and not credit quality, and the Company has the ability and intent to hold these investments until maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2007 and December 31, 2006. The U.S. government agency obligations mature within two years and the CLO matures in 2019, although the maturity may be sooner.

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4.    Net Credit Swap Revenues and Portfolio

Overview

Net credit swap revenue as presented in the 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 the termination of 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 an unrelated third party or portfolio of third parties (the ‘‘Reference Entity’’) specified in the contract be subject to one of a specified group of events (‘‘Credit Events’’). 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 taking the risk of the contract, 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. Premium income is recognized ratably over the life of the transaction as a component of net credit swap revenue. When the Company purchases credit swaps from its counterparties, the Company pays fixed premiums over the term of the contract. Premium expense is recognized ratably over the life of the transaction as a component of net credit swap revenue.

All credit swap transactions entered into between the Buyer and the Seller are, or will shortly be, subject to an International Swaps and Derivatives Association, Inc. Master Agreement or (‘‘ISDA Master Agreement’’) executed by both parties. The ISDA Master Agreement allows for the aggregation of the market exposures and termination of all transactions between the Buyer and Seller in the event a default (as defined by the ISDA Master Agreement) occurs in respect of either party.

The primary risks inherent in the Company’s activities are (a) where the Company is a Seller that Reference Entities specified in its credit swap transactions will experience Credit Events that will require the Company 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 the Company 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 the Company will default on their required premium payments. The Company has not experienced any of these events since its inception.

The Company terminates a credit swap in one of two ways. The Company may negotiate an agreed termination with 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). 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.

In accordance with accounting principles generally accepted in the United States, the Company carries its credit swaps on its 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 or decline in fair value during a period, the increase will add to the Company’s net credit swap revenue and the decline will subtract from the Company’s net credit swap revenue for that period, respectively. 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

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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 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 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 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. Primus Financial and PRS Trading Strategies each enter into a valid ISDA Master Agreement with each of their counterparties.

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

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. As a general rule, when Primus Financial sells credit swaps, 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 could 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 and credit swaps sold-tranche. Credit swaps sold-single name refers to credit swaps referencing a single entity. Credit swaps sold-tranche refers to credit swaps referencing portfolios containing obligations of multiple reference entities.

PRS Trading Strategies

PRS Trading Strategies commenced operations in January 2006 with $50 million of capital contributed by Primus Guaranty from the proceeds of our initial public offering. PRS Trading Strategies trades in a broad range of fixed income products, including credit default swaps, leveraged loans and investment grade and speculative grade securities, among others. Unlike Primus Financial, PRS Trading Strategies has no counterparty ratings from rating agencies and, accordingly, may post collateral with its counterparties to support its contractual obligations. PRS Trading Strategies does not engage in trading activity with Primus Financial. Credit swaps purchased to off-set risks do not

10




qualify as hedges in accordance with SFAS No. 133. PRS Trading Strategies also transacts in credit default swap indices (‘‘CDS index’’), which are over-the-counter transactions based on the risk of credit defaults against a pool of sub-investment grade corporate reference entities.

Revenue and Portfolio Information

The table below presents the components of consolidated net credit swap revenue (loss) for the three months ended March 31, 2007 and 2006 (in thousands).


  Three months ended
March 31,
  2007 2006
Net premium income $ 18,524 $ 15,943
Realized gains 2,796 658
Realized losses (3,169 )  (804 ) 
Change in unrealized gains (losses) (23,028 )  24,332
Total net credit swap revenue (loss) $ (4,877 )  $ 40,129

The Company’s consolidated notional amount, fair value and average fair value of open credit swap transactions (excluding a $1.2 million and a $25 thousand net fair value associated with the CDS index, CDS on ABS and total return swaps) entered into with third parties at March 31, 2007 and December 31, 2006 are as follows (in thousands):


  March 31,
2007
December 31,
2006
Gross Notional Amounts:    
Credit swaps sold-single name $ 15,695,106 $ 15,485,145
Credit swaps sold-tranche 1,100,000 500,000
Credit swaps purchased-single name (266,719 )  (147,597 ) 
Fair value:    
Asset 59,414 73,305
Liability 10,691 2,931
Average fair value:    
Asset 70,525 57,435
Liability 6,320 1,990

‘‘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 Strategies 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.

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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 a $1.2 million and a $25 thousand net fair value associated with the CDS index, CDS on ABS and total return swaps) for the Company as of March 31, 2007 and December 31, 2006 (in thousands).


  March 31, 2007 December 31, 2006
Moody’s Rating Category Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Reference Entity/Tranche        
Credit Swaps Sold – Single Name:        
Aaa $ 828,469 $ 2,132 $ 761,211 $ 1,483
Aa 2,723,048 5,928 2,690,166 9,364
A 5,891,596 22,874 6,075,786 29,501
Baa 5,652,293 33,056 5,427,937 32,786
Ba 535,670 812 470,842 1,467
B 64,030 (1,436 )  59,203 (706 ) 
Total $ 15,695,106 $ 63,366 $ 15,485,145 $ 73,895
Credit Swaps Sold – Tranche:        
Aa $ 850,000 $ (13,789 )  $ 300,000 $ (2,494 ) 
A 250,000 (1,402 )  200,000 (534 ) 
Total $ 1,100,000 $ (15,191 )  $ 500,000 $ (3,028 ) 
Credit Swaps Purchased – Single Name:        
Aa $ (25,000 )  $ 79 $ (15,000 )  $ (15 ) 
A (98,774 )  121 (36,000 )  (10 ) 
Baa (135,445 )  374 (83,636 )  (484 ) 
Ba (5,000 )  (67 )  (6,961 )  235
B (2,500 )  40 (6,000 )  (219 ) 
Total $ (266,719 )  $ 547 $ (147,597 )  $ (493 ) 
Counterparty Buyer/(Seller)        
Credit Swaps Sold – Single Name:        
Aaa $ 3,007,523 $ 13,277 $ 982,194 $ 5,003
Aa 10,172,439 39,908 12,037,591 57,175
A 2,515,144 10,181 2,465,360 11,717
Total $ 15,695,106 $ 63,366 $ 15,485,145 $ 73,895
Credit Swaps Sold – Tranche:        
Aaa $ 50,000 $ 842 $ $
Aa 1,050,000 (16,033 )  500,000 (3,028 ) 
Total $ 1,100,000 $ (15,191 )  $ 500,000 $ (3,028 ) 
Credit Swaps Purchased – Single Name:        
Aaa $ (37,752 )  $ (131 )  $ (9,961 )  $ (120 ) 
Aa (228,967 )  678 (137,636 )  (373 ) 
Total $ (266,719 )  $ 547 $ (147,597 )  $ (493 ) 

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  March 31, 2007 December 31, 2006
S&P Rating Category Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Reference Entity/Tranche        
Credit Swaps Sold – Single Name:        
AAA $ 936,580 $ 1,267 $ 940,031 $ 1,721
AA 2,546,801 7,161 2,275,564 8,845
A 6,148,166 23,048 6,490,958 30,644
BBB 5,465,889 31,861 5,271,390 32,958
BB 520,633 1,635 438,499 1,060
B 77,037 (1,606 )  68,703 (1,333 ) 
Total $ 15,695,106 $ 63,366 $ 15,485,145 $ 73,895
Credit Swaps Sold – Tranche:        
AAA $ 350,000 $ (6,055 )  $ 150,000 $ (2,010 ) 
AA 600,000 (8,673 )  200,000 (1,613 ) 
A 150,000 (463 )  150,000 595
Total $ 1,100,000 $ (15,191 )  $ 500,000 $ (3,028 ) 
Credit Swaps Purchased – Single Name:        
AA $ (25,000 )  $ 78 $ (15,000 )  $ (15 ) 
A (103,774 )  245 (56,000 )  (10 ) 
BBB (125,445 )  341 (58,636 )  (473 ) 
BB (10,000 )  (157 )  (13,961 )  214
B (2,500 )  40 (4,000 )  (209 ) 
Total $ (266,719 )  $ 547 $ (147,597 )  $ (493 ) 
Counterparty Buyer/(Seller)        
Credit Swaps Sold – Single Name:        
AAA $ 5,000 $ 20 $ 31,406 $ 104
AA 11,902,496 50,120 11,732,030 58,698
A 3,787,610 13,226 3,721,709 15,093
Total $ 15,695,106 $ 63,366 $ 15,485,145 $ 73,895
Credit Swaps Sold – Tranche:        
AAA $ $ $ 100,000 $ (1,335 ) 
AA 1,100,000 (15,191 )  400,000 (1,693 ) 
Total $ 1,100,000 $ (15,191 )  $ 500,000 $ (3,028 ) 
Credit Swaps Purchased – Single Name:        
AA $ (142,828 )  $ 792 $ (127,995 )  $ (665 ) 
A (123,891 )  (245 )  (19,602 )  172
Total $ (266,719 )  $ 547 $ (147,597 )  $ (493 ) 

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, 2007 and 2006, respectively, one and two counterparties each generated greater than ten percent of the Company’s total net premium revenue.

13




The table below shows the geographical distribution of the Company’s credit swap portfolio by domicile of the Reference Entity and domicile of the counterparty as of March 31, 2007 and December 31, 2006 (in thousands):


  March 31, 2007 December 31, 2006
Country of Domicile Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Credit Swaps Sold – Single Name        
By Reference Entity:        
North America $ 9,293,722 $ 34,388 $ 9,133,328 $ 46,286
Europe 5,667,384 26,560 5,612,817 25,097
Pacific 565,000 1,557 570,000 1,351
Others 169,000 861 169,000 1,161
Total $ 15,695,106 $ 63,366 $ 15,485,145 $ 73,895
By Counterparty:        
North America $ 8,072,890 $ 30,754 $ 7,904,024 $ 36,321
Europe 7,527,216 32,487 7,486,121 37,502
Pacific 75,000 40 75,000 (17 ) 
Others 20,000 85 20,000 89
Total $ 15,695,106 $ 63,366 $ 15,485,145 $ 73,895
Credit Swaps Sold – Tranche        
By Counterparty:        
North America $ 50,000 $ 842 $ 50,000 $ 851
Europe 1,050,000 (16,033 )  450,000 (3,879 ) 
Total $ 1,100,000 $ (15,191 )  $ 500,000