Portfolio Management

Portfolio management activities are based upon credit research focusing on a reference entity and its relative position to peers in its industry. The research incorporates information from a variety of sources.

• Rating agency ratings and agencies' company/industry credit analysis
• Security analysts' company/industry analysis
• KMV and other credit default risk models
• Financial market indicators including equity, bond and credit default swap prices
• Current news and information on the company and its industry
• Portfolio analysis incorporating Primus' and external capital models

This process results in the portfolio manager determining a Primus rating and a limit for each reference entity in the portfolio. These ratings are determined prior to any transactions on the reference entity, are monitored continuously and are reconfirmed at least quarterly. Portfolio management relies on these ongoing reviews to determine whether any action is required or to hedge a deteriorating credit. Portfolio managers also use broad levels of diversification and transact in a range of maturities to further mitigate portfolio risks. Primus will only transact for its portfolio if it understands the credit risk associated with the reference entity and believes it is being fairly compensated for that risk.

No reference entity will be selected for Primus Financial's portfolio without the approval of the Chief Risk Officer for credit risk and the Chief Trader for pricing.

The trading and investment professionals examine the following factors in selecting portfolio investments:

• Economic and financial market conditions and macro-economic events affecting the credit markets generally and/or particular industry sectors
• Activity in the bond/loan/convertible markets, CDO's and other linked markets and other technical factors that may have a bearing on credit default swap pricing
• Changes in market perspective on individual reference entities which represent possible opportunities or credit problems

Primus Financial is uniquely positioned in the market as a credit derivative operating company. As a principal in its transactions and an end risk taker, Primus Financial's investment decisions are based on the risk adjusted returns at the time of the transaction. Primus Financial's objective is to manage a broadly diversified portfolio with exposure across a wide spectrum of investment-grade Reference Entities. As of fiscal year end, the portfolio had a weighted average rating of A/A2 with diversification across 350 Reference Entities in over 30 industry groups.