Primus Guaranty, Ltd.
Investor Day
December 7, 2005
Forward-Looking Statements
Certain information included in this presentation and other statements or materials published or to be published by the Company are not historical facts but are forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new and existing products, expectations for market segment and growth, and similar matters. The Company provides the following cautionary remarks regarding important factors which, among others, could cause the Company’s actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company’s forward-looking statements. The risks and uncertainties that may affect the operations, performance, development, results of the Company’s business, and other matters referred to above include, but are not limited to: (i) failing to manage effectively the risk of credit losses; (ii) a decline in Primus Financial’s counterparty ratings or counterparties’ perception of its creditworthiness; and (iii) the loss of key personnel.
December 7, 2005
1
Introduction
And
Strategic Overview
Thomas W. Jasper
Chief Executive Officer
Conference Agenda
Introduction & Strategic Overview
Thomas W. Jasper Chief Executive Officer
Overview of the Credit Swap Market
Candace Lau-Hansen Global Head of Marketing
Building and Managing the Primus Financial Portfolio
Charles B. Truett Head of Portfolio Management
Third-Party Asset Management
Michael Hyland Senior Advisor
PRS Trading Strategies
Max Roberts Chief Trading Officer
Financial Performance
Richard Claiden Chief Financial Officer
Conclusion
Thomas W. Jasper Chief Executive Officer
Q & A Session
December 7, 2005
3
Our Core Business is Selling Single Name Credit Swaps
The Basics – What is a credit swap?
Premium
Payment Upon
Credit Event
Reference Entity
“IBM”
Protection Buyer
“Counterparty”
Protection Seller
“Primus”
December 7, 2005
4
Investor Day Themes
Dynamic
Growth
Market
Portfolio
Growth
Diversification
Strong
Returns
December 7, 2005
5
History
$155 million equity
issued to XL,
AEGON, PCG and
Radian
AAA/Aaa ratings
Capitalization
& Ratings
1 transaction
7 counterparties
Launch
$312 million capital
34 counterparties
Business
Expansion
Company
Formation
Op. guidelines
Capital models
Op. platform
$100 million perpetual
preferred
Financing
March 2002
June 2002
June 2004
1998 – 2002
December 2002
September 2004
December 2004
December 2005
July 2004
March 2005
$75 million AAA debt
financing
Financing
$110 million IPO
proceeds
1 Primus AM
transaction
Financing and
Business Expansion
2 Primus AM
transaction
38 counterparties
Business
Expansion
1 Tranched trade
Non-IG
Increased industry
limits-10%
Business
Expansion
$125 million debt
offering
42 counterparties
Financing and
Business Expansion
st
nd
st
st
December 7, 2005
6
Primus Guaranty, Ltd. – Financial Performance
9/30/2004
9/30/2005
% Growth
Third Quarter Economic Results
$5.3
$10.4
96%
Third Quarter Economic EPS
$0.15
$0.23
53%
Economic RoE
9.3%
13.2%
42%
Portfolio of Credit Swaps Sold
$9.4bn
$13.1bn
39%
Unearned Premiums
$129
$185
43%
December 7, 2005
7
What is the Opportunity?
Traditional credit providers have become distribution
businesses
Credit swap has become the primary tool for transferring
credit risk
Credit swap premiums offer attractive risk adjusted returns
Highly rated seller of credit protection with an efficient
capital model and operating platform can capture this
opportunity
December 7, 2005
8
The Primus Strategy
Primus
Strategy
Growing
Core
Business
Diversifying
Business
Model
Selling Credit
Protection
Asset
Management
December 7, 2005
9
Key Accomplishments
Major participant CDS market – only focused AAA/Aaa seller of credit
protection
Established relationships - 42 global financial institutions
Built a $13.1 billion notional credit swap portfolio
Demonstrated ability to manage credit risk
Broadened product offerings – tranches and non-IG
Diversifying revenue base – managing two SCDO’s
Expanded geographically – London office
Strong growth in Economic Results - improving Economic RoE
December 7, 2005
10
Richard
Claiden
Chief Financial
Officer
Max
Roberts
Chief Trading
Officer
Candace
Lau-Hansen
Global Head of
Marketing
Alec
Rainsby
Chief Technology
& Operations
Officer
Charles
Truett
Head of
Portfolio
Management
Zachary
Snow
General Counsel
Malcolm
Basing
Chairman of
Primus Guaranty
(UK)
Premier Management Team
Tom Jasper
Chief Executive Officer
Former Managing Director and Global Treasurer –
Salomon Smith Barney Holdings, Inc. Co-founder and
initial Chairman of ISDA
December 7, 2005
• Former COO
UBS Americas;
Global Head, UBS
Warburg Finance
Group; CEO SBC
Canada; Head of
Global Swaps
Swiss Bank
Corporation
•Former Chairman
of ISDA
•Former Managing
Director, Operations
and Technology –
JP Morgan Chase
• Former Managing
Director and Head
of Financial
Products Operations
for CIBC
• Former Managing
Director, Structured
Credit Products and
Financial
Institutions Group
– JP Morgan Chase
• Former Managing
Director, Debt
Markets Technology
– Merrill Lynch
• Head of Credit
Derivatives trading
and co-founded the
Credit Derivatives
Group at Wachovia
Securities
• Senior Trader and
Structurer - Merrill
Lynch
• Former EVP and
General Counsel –
Bridge Information
Systems, Inc.
• Former Managing
Director and Head
of U.S. Legal
Department –
Salomon Brothers
• Former Senior
Risk Mgn’t
Executive and
Senior Credit
Officer – Bank of
America
11
Corporate Structure
Primus Guaranty, Ltd.
Primus Financial Products
AAA/Aaa rated seller
Primus Asset Management
Asset Management Company
PRS Trading
Strategies
December 7, 2005
12
Outlook
Current Environment
Tight premiums
Low volatility
Low defaults/ high event risk
Competitive landscape
CDS market poised for premium widening
Our Approach
Opportunistic growth – RAROC
Expand core business products – CDS of ABS
Expand our Asset Management activities
Well Positioned for Future Growth
Large and growing capital base
Broad range of product offerings
AAA/Aaa ratings – Basel II
Expanding counterparty relationships
December 7, 2005
13
Value Proposition
High growth in Economic Results earnings per share – in
excess of 30% per annum
Strong returns on equity - high teens to 20%
Shareholders should expect a well managed, high quality
business that produces –
December 7, 2005
14
Overview
of the
Credit Swap Market
Candace Lau-Hansen
Global Head of Marketing
Primus Participates in a Rapidly Growing and Attractive Market
Source: BBA (1997-2000, 2004) and ISDA (2001-2005).
Growth of the Credit Swap Market
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
$10,000
$11,000
$12,000
$13,000
1997
1998
1999
2000
2001
2002
2003
2004
1H05
Global Credit Swaps Outstanding
($ in billions)
•
Efficient risk transfer
•
Broad acceptance
•
Market liquidity
•
Standard documentation
•
New participants
•
Product enhancements
•
Efficient risk transfer
•
Broad acceptance
•
Market liquidity
•
Standard documentation
•
New participants
•
Product enhancements
December 7, 2005
16
Spread Environment
Liquidity and price transparency continue to improve in an
eventful market
11/28/05
CDX 4 – North American Investment Grade
September 2004-November 2005
25
40
55
70
9/30/2004
10/30/2004
11/30/2004
12/30/2004
1/30/2005
2/28/2005
3/30/2005
4/30/2005
5/30/2005
6/30/2005
7/30/2005
8/30/2005
9/30/2005
10/30/2005
December 7, 2005
High: 78.75 @ 5/18/05
Low: 37 @ 3/10/05
17
CDS: Building Blocks for Product Innovation
BASKET
SWAPS
(FTD)
SINGLE
NAME
CREDIT
SWAPS
CREDIT
OPTIONS
INDEX
PRODUCTS
PUBLIC
CDOS
FIXED
RECOVERY
SWAPS
BESPOKE
CDOs
December 7, 2005
18
The Market Participants
Source: Morgan Stanley (October 2005) and British Bankers’ Association CDS Report
Protection Buyers
Protection Sellers
OTHER
9%
HEDGE FUNDS
3%
INSURANCE
COMPANIES
7%
SECURITIES
FIRMS
18%
BANKS
63%
OTHER
9%
HEDGE FUNDS
5%
INSURANCE
COMPANIES
16%
SECURITIES
FIRMS
23%
BANKS
47%
December 7, 2005
19
Why do Market Participants buy Protection?
Insurance
Companies
•Regulatory
capital relief
•Credit risk
management
•Express a
view on a
credit
•Package
with other
products
(eg. bonds
or converts)
•Reduce/
diversify liability
concentrations in
an insurance
portfolio
•Creation of
forward long
positions to hedge
near term default
risk
•Express a
view on a
credit
•Create
forward
trades
•Market
intermediary
•Credit risk
management
•Regulatory
capital relief
Asset
Managers
Securities
Firms
Hedge
Funds
Banks
December 7, 2005
20
Structured Credit – Robust Growth Continues
2005 volumes are on track to surpass total 2004 issuance
Source: Morgan Stanley; November 2005
Total
Notional,
$116BN
Total
Notional,
$117BN
Credit Risk
(Delta
Adjusted),
$225BN
Credit Risk
(Delta
Adjusted),
$332BN
0
50
100
150
200
250
300
350
2004 (Full Year)
2005 (1st Half)
December 7, 2005
21
Current Market Trends
Structural leverage (CDO^2, Leveraged super senior)
Going down the credit curve (bigger non-investment grade
buckets)
Extended maturities (7-, 10-year)
Product enhancements and innovation: fixed recovery swaps,
adjustable subordination, cross-subordination, and principal
protection
Benign credit markets create a never-ending search for yield
December 7, 2005
22
Synthetic Asset Backed Securities (ABS) – The New Wave
CDS on ABS market growing rapidly
Compressed time frame relative to
corporate CDS
Enhances liquidity – allows efficient
shorting
Acquire exposure to different vintages
of collateral
Standardized legal documentation has
fuelled growth
Indices (ABX, CMBX) will increase
liquidity in the market
Cash ABS CDOs with synthetic buckets
100% synthetic ABS CDOs
Bespoke synthetic ABS trades
Issuance of US ABS
80.1
79.1
53.1
41.8
536.0
502.1
188.8
203.8
0
100
200
300
400
500
600
700
800
900
1000
2004
3Q 2005
Year
Total ABS
Issuance ($ BN)
Auto
Credit Card
HEL
Other
December 7, 2005
23
Regulatory Changes from Basel II will fuel Growth
Primus, as a AAA/Aaa-rated counterparty, will be among
the winners in this new regime
Source: Basel II Document: Section II, Paragraphs 53, 55 63
Note: For OECD Banks, this assumes “Option 2” credit assessment of Banks. If assessed based upon the sovereign rating, 20%, 50%, 100%, 100%, 150%, 100%
Winners
Winners
Credit Capital Under Basel II
AAA/AA-
A+/A-
BBB+/BBB-
BB+/BB-
B+/B-
Below B-
Unrated
0%
20%
20%
Mortgage= 35%
20%
50%
50%
50%
50%
100%
Revolving 75%
100%
100%
100%
150%
150%
150%
100%
50%
100%
Other Retail =75%
OECD Sovereign
OECD Banks
Corporates
Retail
Green shading = lower capital requirements
December 7, 2005
24
Strong growth expected to
continue
Product diversification and
innovation
Projected Product Split
25%
12%
16%
42%
0%
10%
20%
30%
40%
50%
Other
Index trades
Synthetic CDO's
CDS
Source: ISDA
Credit Markets Growth (CDS and Structured)
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
2003
2004
1H2005
Year
$ mm
What is on the Horizon?
Source: BBA 2003/2004 Survey
3,580
8,420
12,430
December 7, 2005
25
Building and Managing the
Primus Financial Portfolio
Charles B. Truett
Head of Portfolio Management
The Opportunity
Large and rapidly growing market - strong demand for CDS
protection
Value proposition - capture differential between CDS
premiums and expected loss
Attractive risk return profile
(1) Reflects 5 year credit swap transactions and Moody’s idealized cumulative expected loss rate (annualized)
The Primus Focus
Historical CDS
Premiums
Historical Annual Expected
Loss
0
50
100
150
200
250
300
AAA/Aaa
AA+/Aa1
AA/Aa2
AA-/Aa3
A+/A1
A/A2
BBB+/Baa1
BBB/Baa2
BBB-/Baa3
BB+/Ba1
BB/Ba2
BB-/Ba3
B+/B1
December 7, 2005
1
27
The Primus Financial Strategy
Underwrite risk to term
Achieve attractive risk adjusted returns
Constantly monitor credit changes
Aggressively manage credit deterioration
December 7, 2005
28
Executing on the Strategy
Disciplined investment process to achieve consistent performance
RISK MANAGEMENT
OPERATING PLATFORM
UNDERWRITING
Reference Entity Qualification
Review and Flag Potential Issues
Head of PM Approval
Primus Rating / Limit
Continuous Risk Review
Daily Mark to Market
Primus Rating Reconfirmations
Risk Mitigation
Real
-
time control
State of the art technology
December 7, 2005
29
Portfolio Management Tools
COMPANY NAME
S&P INDUSTRY :
MOODY'S INDUSTRY :
BUSINESS DESCRIPTION
RATING DATA
S & P
MOODYS
PRIMUS
Rating
Watch
Outlook
Rating
Watch
Outlook
Rating
A
neg
Baa1
BBB+
LIMIT DATA
1 year(mm)
2 year(mm)
3 year(mm)
5 year(mm)
7 year(mm)
Computed Limit
41
41
41
41
0
Existing Credit Limit
25
25
25
15
0
Exposure (QRE) Exposure by Trades
5
5
5
5
0
Availability
20
20
20
10
0
Exposure (Family)
N/A
N/A
N/A
N/A
N/A
Tranche Exposure
0
0
0
0
0
Total Exposure
5
5
5
5
0
Pam Managed Transaction:
PRIMUS PRISMs 2004-1
MARKET DATA
Estimated Buy Out Value (As of last
business day close)
Primus MTM 5YR Premium – BID
BID
20
OFFER
25
SOURCE
'D'
Mark-It 5YR Premium – BID
20
Asset Swap Spread Instruments
0
Equity Price
41
Market Cap
55,785
FINANCIAL DATA (mm), USD Equivalant
Current Period
BALANCE SHEET
9/30/2005
6/30/2005
9/30/2004
12/31/2004
9/30/2005
Total Assets
34,399.39
33,773.59
--
31,031.92
N/A
ST Borrowings
8.52
9.12
--
1,512.85
N/A
LT Borrowings
7,789.14
7,947.03
--
8,076.43
N/A
Total Debt (ST & LT Debt)
7,797.66
7,956.14
--
9,589.27
N/A
Total Shareholders Equity
11,324.90
10,754.05
--
9,294.38
N/A
Tangible Net Worth
11,324.90
10,754.05
--
9,294.38
N/A
Net Debt
11,324.90
10,754.05
--
9,294.38
N/A
INCOME STATEMENT
Net Sales
4,716.26
4,713.84
--
17,358.03
18,657.29
EBITDA
1,502.44
1,384.58
--
4,449.72
5,418.44
Interest Expense
117.70
101.10
--
414.10
340.70
Net Income
869.86
976.57
--
1,234.00
1,160.26
RATIO ANALYSIS
Gross Margin
72.61
71.63
--
71.50
71.26
EBIT Margin
25.50
25.94
--
24.75
103.16
Pretax Margin
2.24
2.61
--
-0.75
8.19
Operating Income Growth
3.13
13.10
--
9.82
4,757.93
EBITDA to Total Interest Expense
11.42
12.10
--
9.45
58.44
Return on Common Equity
10.34
16.56
-- ��
23.51
70.69
Total Debt to EBITDA
1.44
1.47
--
2.16
1.44
Total Debt to Total Capital
40.78
42.52
--
50.78
212.86
FFO to Total Debt
1.37
1.20
1.07
1.14
1.37
Net Debt to EBITDA
1.44
1.47
--
2.16
7.41
Market Cap to Shareholders Equity
14.32
20.33
--
25.92
97.36
Current Year
1
2
3
4
5
DEBT MATURITIES
0.00
0.00
0.00
300.00
0.00
8,770.00
Previous
Period
(Y-O-Y)
Period
Most Recent Year
End
Trailing 12
months
December 7, 2005
30
Note: Long CDS Portfolio
Portfolio Managers
Seasoned professionals
Supported by seasoned trading managers
Portfolio Manager
Title
Years of Credit Experience/Institution
Charles Truett
Head of Portfolio
Management
31 years/ Bank of America and Continental Bank
Vince Abruzzini
Senior Credit Portfolio
Manager
25 years/ Deutsche Bank (Bankers Trust)/ Merrill
Lynch/ Summit Bank/NASD/Household Finance
Michel Hugon
Senior Credit Portfolio
Manager
28 years/DZ Bank/CSFB/Moody's/Oesterreichische
Landerbank/Banque Nationale de Paris
David Kubie
Senior Credit Portfolio
Manager
25 years/ Dresdner Bank
December 7, 2005
31
Measuring Performance
Achieving notional growth targets
Appropriate risk adjusted returns
Control total credit costs, comprised of
Realized losses
Portfolio migration
December 7, 2005
32
Note: Long CDS Portfolio
Performance
By S&P Geographic Concentration
By S&P Industry
Portfolio statistics as of September 30, 2005:
Total notional of portfolio: $13.0BN
Weighted Average Maturity: 3.3 years
Weighted Average Rating: A/A3
Number of Reference Entities: 533
Others
1.01%
North
America
59.37%
Pacific
2.99%
Europe
36.63%
A
46.22%
AA
16.05%
AAA
5.24%
B
0.05%
BB
1.01%
BBB
31.44%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Portfolio Statistics
By S&P Rating
Built high quality & highly diversified portfolio
December 7, 2005
33
Performance
Realized Losses
($ in 000’s)
There have been no credit events in the Primus portfolio
Life to date Credit Mitigation expense is less than 2 basis points of average portfolio notional
Portfolio-CDS
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
3Q-02
4Q-02
1Q-03
2Q-03
3Q-03
4Q-03
1Q-04
2Q-04
3Q-04
4Q-04
1Q-05
2Q-05
3Q-05
billion
2 billion
4 billion
6 billion
8 billion
10 billion
12 billion
14 billion
Realized Losses
Portfolio-CDS
December 7, 2005
34
Performance
Outperformed the benchmarks
Note: Credit Migration below investment grade statistics from June 2002 – August 2005 and based on 1,166 Primus eligible investment grade reference entities
Credit Migration to below
Investment Grade
4.0%
4.2%
1.3%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
S&P
Moody's
Primus
December 7, 2005
35
Credit risk
Resource constraints
Capital availability
Counterparty capacity
Challenges
December 7, 2005
36
Portfolio growth
Risk adjusted returns
Controlled credit costs
Tying it all Together
Growth in
Economic Results
Attractive returns
to shareholders
December 7, 2005
37
Primus Guaranty, Ltd.
Investor Day
December 7, 2005
Break
Third Party Asset Management Strategy
Michael Hyland
Senior Advisor
What is our Asset Management Strategy?
Primus intends to leverage its platform by:
Adding the capacity to manage other synthetic assets and CDOs
Expanding into the cash CDO business
Managing a relative value credit hedge fund
December 7, 2005
40
Source: Lehman Brothers
Note: Global CDO Issuance excludes all balance sheet CDOs
Structured Credit Markets are Large, Diversified, and Growing
While spreads have narrowed materially, liability costs have
declined, maintaining CDO economics
Product innovation has resulted in many investment management
vehicles
$BN
$-
$25
$50
$75
$100
$125
$150
1996
1997
1998
1999
2000
2001
2002
2003
2004
Synthetic
Cash Flow/Market Value
% of Total
0%
20%
40%
60%
80%
100%
1996
1997
1998
1999
2000
2001
2002
2003
2004
Asset Backed Securities
High Yield Bonds
Leveraged Loans
Investment Grade
Other
December 7, 2005
41
Credit swaps
14.2%
Leveraged loans
30.3%
Emerging Markets
0.3%
Asset Backed Securities
38.0%
Other
4.0%
Trust Preferred
6.7%
Unknown
0.2%
CDO
2.4%
Hedge Funds
0.6%
Middle market loans
3.3%
Synthetic Structured Credit: A Growing Portion of the Overall Market
Structured Credit - 2004 Collateral Composition of CDO Issuance
Source: Morgan Stanley
December 7, 2005
42
CDO Cash and Synthetic Product Opportunities
December 7, 2005
Europe
US
Cash
N/A*
Robust
Robust
N/A
Synthetic
Moderate
N/A 2006
Moderate
Moderate
Cash
N/A
Robust
N/A
N/A
Synthetic
Moderate
N/A 2006
N/A
Moderate
Investment Grade
Leveraged Loans
ABS
High Yield
NA*. Market conditions, i.e. tighter spreads, or the development of more marketable products have replaced the product category
43
Primus will capture the asset management opportunity through
selective acquisition and/or team lift out
How will Primus Capture the Opportunity?
Build
Team Lift Out
Buy a whole company
Pros
Aligned incentives and culture fit
Lower investment need
Higher longer-term return potential
Cons
Scale in a timely manner
Lowers near-term profits
Track record
Client relationships
Leverages infrastructure
Scale in a timely manner
Lowers near-term profits
Integration risk/culture
Immediate scale
Accelerates valuation impact
Track record
More capital intensive
Potentially costly
Execution and integration risk
December 7, 2005
44
Continuing to review potential acquisition opportunities
A team lift out or hiring of key individuals is the most likely
path for expansion
Expect to see action on this initiative in early 2006
Progress and Outlook
December 7, 2005
45
PRS Trading Strategies, LLC
Max Roberts
Chief Trading Officer
What is The Opportunity?
The CDS market has developed a broad range of products and
strategies which do not lend themselves to a AAA/Aaa company
such as Primus Financial
Primus has the opportunity to leverage its existing operating platform
with a new trading vehicle utilizing different strategies
Increase shareholder value
Broaden Primus’ footprint
Establish a track record that could be used to raise third party capital
December 7, 2005
47
What Does The New Strategy Involve?
Relative value
investing across
credits, curves, and
instruments
Attractive risk adjusted returns not dependent
on whether credit swap premiums are wide or
narrow
Short term investment horizon (3 mo. avg.)
Focus on liquid credits
Invest in synthetic credit products
Maintain Primus’s high standards of discipline,
governance, and control
Supported by
strong risk
management and
control
Value at Risk (VaR) model
Stress testing
Liquidity and collateral management
Leverage: 10x
Performance
measurement
8-10% ROI
December 7, 2005
48
Comparative Advantage
Primus has a comparative advantage when entering into a
credit trading business
Fundamental credit research
Product trading capability
Market pricing
Trade capture, confirmation and settlement support
Financial reporting and control
Quantitative modeling
Management team has run trading businesses and
overseen risk management
Primus has a top notch reputation in the credit
markets and strong dealer relationships
Established
infrastructure
Management &
reputation
Market
capabilities
December 7, 2005
49
Historical CDS /
Tranche Data
Real time CDS /
Tranche Data
Technical Information
Changes in Outlooks
or Ratings of Primus
QRE’s by Primus
Portfolio Management
Fundamental Information
Statistical &
Quantitative
Analysis Based
Trade Ideas
Trade Ideas
Screen for
fundamental
support by
reviewing
Portfolio
Manager’s
credit research
Trading Desk
Screen for
technical
support by
running
statistical &
quantitative
analysis
Filtered trade
ideas
Rank relative
value trading
opportunities
based on:
Expected
return
Capital
required
Expected
holding period
Execute top
ranked trade
opportunities
and set stop
losses subject
to:
Minimum
expected return
on capital
Portfolio
constraints
Trading Desk
Mark to market
all trades on a
daily basis
Existing positions are continuously fed back through the investment process to monitor their relative value and apply stop losses
Disciplined Trade Execution
December 7, 2005
50
Systems built to manage and control the relative value
strategy
Financial controls implemented and will be Sarbanes/Oxley
compliant
$50MM of capital will be contributed to PRS Trading
Strategies, LLC
Planning to commence trading in January 2006
Status Update
December 7, 2005
51
Financial Performance
Richard Claiden
Chief Financial Officer
GAAP Results Versus Economic Results
Market premium widening---negative GAAP
Market premium tightening---positive GAAP
GAAP Net Income (Loss)
Economic Results
($ in millions)
($ in millions)
Note: The fourth quarter expenses for both 2003 and 2004 exclude non-recurring expenses of $3.2mm and $3.3mm respectively. The $3.2mm
was due to write-off of software costs in 2003, and the $3.3mm in 2004 is due to acceleration of employee stock and option expense as a result of
the IPO.
($20)
($10)
$0
$10
$20
$30
$40
$50
1Q-03
2Q-03
3Q-03
4Q-03
1Q-04
2Q-04
3Q-04
4Q-04
1Q-05
2Q-05
3Q-05
$0
$2
$4
$6
$8
$10
$12
1Q-03
2Q-03
3Q-03
4Q-03
1Q-04
2Q-04
3Q-04
4Q-04
1Q-05
2Q-05
3Q-05
December 7, 2005
53
Primus Guaranty, Ltd. Financial Results Overview
NOTE: Represents Economic book value for Primus Financial Products, LLC
9/30/2003
9/30/2004
9/30/2005
Net premium income
$29,520
$31,004
$37,561
Net realized gains/(losses)
14,427
5,574
(3,052)
Mark-to-market
35,603
(10,412)
(18,837)
Interest income
1,915
2,534
10,969
Other
80
298
(1,004)
Total GAAP revenues
81,545
28,998
25,637
Operating and other expenses
16,534
17,135
20,117
Financing costs
1,365
1,925
4,545
Total expenses
17,899
19,060
24,662
Net GAAP income
$63,646
$9,938
$975
RECONCILIATION from GAAP to Economic Results
Less: Mark-to-market on credit swaps sold (gain)/loss
(35,603)
9,214
19,008
Less: Realized gains from credit swaps sold
(15,089)
(5,360)
(790)
Add: Amortization of realized gains
1,576
4,494
5,027
Net Economic Results (loss)
$14,530
$18,286
$24,220
Nine-months ended September 30
Unaudited
December 7, 2005
54
Growth in Economic Results
32%
26%
Impressive
year-over-year
growth
($ in millions)
$14.5
$18.3
$24.2
$10
$15
$20
$25
$30
9/30/03
9/30/04
9/30/05
Economic Results
Nine-months ended September 30
December 7, 2005
55
Portfolio Growth
NOTE: Represents portfolio of credit swaps sold for Primus Financial Products, LLC
$4.7 Bn
$13.1 Bn
$1 Billion
$5 Billion
$9 Billion
$13 Billion
$17 Billion
12/31/02
12/31/03
12/31/04
9/30/05
December 7, 2005
56
2005 Market Snapshot & Primus Results
Credit spread widening leads to acceleration in business growth
($ in 000’s)
40 bp
60 bp
80 bp
12/31/2004
3/31/2005
6/30/2005
9/30/2005
Dow Jones CDX Series 4
$50,000
$33,000
$15,000
0
10,000
20,000
30,000
40,000
50,000
60,000
31 - Mar
30 - J un
30 - Sep
billion
1 billion
2 billion
3 billion
New Deal Gross Premiums
New Deal volume
December 7, 2005
57
Growth in Unearned Premiums
NOTE: Represents Economic book value for Primus Financial Products, LLC
($ in millions)
$110
$129
$185
$0
$25
$50
$75
$100
$125
$150
$175
$200
$225
9/30/03
9/30/04
9/30/05
Unearned Premiums
December 7, 2005
58
Growth in Capital
($ in million’s)
NOTE: Represents cash capital for Primus Financial Products, LLC
$212
$241
$419
$434
$63
$63
$63
$558
$21
$9
$221
$262
$497
$482
$621
$0
$100
$200
$300
$400
$500
$600
$700
$800
12/31/02
12/31/03
12/31/04
9/30/05
Pro Forma 9/30/05
Primus Financial Products
PGL & PAM
December 7, 2005
59
Economic Results Earnings Per Share
NOTE: Represents Economic book value for Primus Financial Products, LLC
Earnings per Share
Nine months ended September 30
$0.43
$0.52
$0.54
$0.00
$0.10
$0.20
$0.30
$0.40
$0.50
$0.60
$0.70
$0.80
$0.90
$1.00
9/30/03
9/30/04
9/30/05
IPO
Diluted Share
Count:
35.1 million shares
Diluted Share
Count:
44.7 million shares
December 7, 2005
60
Core CDS Business-Significant Opportunity for Growth
($ in billions)
$-
$4,000
$8,000
$12,000
$16,000
$20,000
$24,000
$28,000
1997
1998
1999
2000
2001
2002
2003
2004
1H-05
2006
2007
2008
2009
Significant
Opportunity for
growth
December 7, 2005
61
Economies of Scale
35bp
24bp
21bp
bp
20bp
40bp
60bp
9/30/03
9/30/04
9/30/05
5 billion
10 billion
15 billion
Operating expenses - basis points (bp)
Portfolio single name CDS
$13.1 billion
CDS notional
December 7, 2005
62
•
•
•
•
•
2003-2005
2006
Enhancing Core CDS Business Platform
December 7, 2005
Euro denomination
Tranches
Non-IG
Increased Industry Limits – 10%
Increase domicile flexibility
ABS
Basel II
Increase number of Counterparties
Continued enhancement to
Operating Guidelines
•
•
•
•
63
Improving RoE Through Asset Management
Asset
Management
Current market fee
35-50 basis points
• 2-3 deals per annum
•Primus invests $3-5 million
per deal
CDO/CLO
Current market fee
10-20 basis points
• Asset Class: IG, Non-IG,
ABS
• 2-3 deals per annum
• PFP tranche investment
SCDO
Current market fee
2%/ 20%
PRS Trading
Primus invests $50 million
3rd Party Capital
Credit Hedge Fund
December 7, 2005
64
Capital Management
The future
•
Capital supports growth
•
Investment in ancillary businesses
Current
PFP
PGL Shelf
PGL Rating
PFP Debt
Retained cash flows
Addressing Capital Needs
PAM/PGL
PAM/PGL/
PRS Trading
PFP
December 7, 2005
65
Growth in Earnings Per Share and RoE
2005
GOAL:
High teens/ 20%
RoE
The Future
December 7, 2005
30%+ growth in per annum EPS
Core business CDS: High teens RoE
Asset Management: incremental RoE
PGL Consolidated: High teens/ 20% RoE
Core business CDS: mid teens ROE
Asset Management
66
Conclusion
Thomas W. Jasper
Chief Executive Officer
Summary and Conclusion
December 7, 2005
Capturing unique growth opportunities in the credit markets
Built a large high quality credit swap portfolio
No credit events
Minimal credit mitigation charges
Expanding into related activities of the credit markets
Producing attractive earnings growth and returns
68