PRS Results Better than Expected

Primus Guaranty, Ltd. (PRS - Analyst Report) reported its 1Q09 financial results today morning, with a conference call held later. GAAP net income came in at $106.8 million or $2.61 per diluted share for 1Q09, compared to a GAAP net loss of $918.5 million or $21.20 per diluted share for 4Q08.

Excluding the net marked-to-market losses arising from changes in the fair value of the credit swap portfolio and amortized gains resulting from the early termination of the credit swaps, economic results for the quarter were a loss of $6.1 million or $0.15 per diluted share, compared to a loss of $60.2 million or $1.39 per diluted share for 4Q08, which was a dime better than our estimate. The economic loss was principally driven by $25.0 million of credit losses within PRS’s credit swap portfolio during the reported quarter.

Economic revenue for 1Q09 came in at $5.8 million, compared to $38.8 million in the prior-year quarter. PRS’s credit swap premium income for 1Q09 was $22.5 million, compared to $27.3 million in the same period a year ago.

Asset management fees for the quarter were $419,000, compared to $1.1 million in 1Q08. The decline in fee income was attributable to the reduction in subordinated fees from the two CLOs, as the fees have been deferred pending the cure of certain tests within the CLOs.

The company continues to operate in amortization mode and does not sell new credit protection. However, it expects improvement in the results for the coming quarters due to current CDS spread tightening. Based on better-than-expected results, we are increasing our FY09 and FY10 estimates and upgrading our recommendation on the shares of PRS to a Hold from Sell.