Maybe I’m being soft on them because they’ve made me so much money the last few weeks, but I was highly impressed by what I heard on the Primus Guaranty (PRS) conference call earlier today.

This could be a function of doing little outside of staring at my stress test model for Primus’ losses; relative to that, results came in about $58 million ahead of the really-bad-case I’ve modeled out. But I think more is at work here than my viewing these numbers through the lens of impending financial doom; CEO Tom Jasper & Co. gave investors a lot to cheer about between the results and the conference call.

Expenses look to be fairly well contained, and the company is looking to cut costs where it can, while balancing that against rewarding employees for the company’s excellent performance so far this year. The liquidity situation looks to be well-managed, and with $893 million in capital, I like the cushion the company has established in case of rising defaults. While I might complain from time to time that Primus should either be retiring the senior notes (PRD) or buying back the common stock, in all honesty the prudent and conservative thing to do in a time when liquidity is extremely pricey is to retain the excess capital. Leverage guidelines say that Primus has plenty of dry powder to write new business; so if new business is hard to come by, why not use that money to buy back pieces of the company on the cheap? I think that Primus has a much better feeling for the marginal risk reduction from having a dollar of capital than outsiders do, and they realize that it would be foolish to increase the risk of the company by levering up in the face of a chasm of uncertainty.

Speaking of new business, the lack of any new business being transacted in the second quarter was disappointing, but not unexpected. Primus doesn’t need the premium income right away, and as capacity returns to the CDS market, there should be more than enough opportunities to utilize that capital more fully. It was encouraging to hear Jasper and CFO Richard Claiden say that the company had written some new business since quarter’s end, and the number of counterparties was being expanded to establish new relationships with those who were looking to do business. Although the overall tone of guidance was tepid, as credit is expected to be strained for at least a few more quarters, this seems to be a marginal improvement over the last conference call. My main concern isn’t about the lack of new business, but rather that the absence of liquidity in the CDS market could hurt Primus’ ability to mitigate swap contracts it no longer wants to carry - the expense for that this quarter was very low, and I almost wished it were higher because of what it represents - taking a smaller capital hit to lower risk.

One of the more interesting things from the call was Jasper’s suggestion that Primus would look to enter the CDS on municipal bond market. Given the troubles of certain fallen angels there, having a company that Moody’s and S&P have actually reaffirmed as Aaa/AAA rated could present a lot of opportunity; though it’ll be telling to see how the ratings agencies, and the market (the ultimate arbiter of rating legitimacy) will treat something like this, given the troubles with the original bond insurers. My two cents is that it needs to be realized the bond insurers did not get in trouble by insuring muni bonds - a well-established and profitable business with lots of known historical data - but by straying into complex and untested structured finance. Likewise, Primus is insuring investment grade corporate debt; get the risk exposures straight. I find it frustrating that the lack of counterparties for Primus has anything to do with the bond insurers, and can only imagine how exasperating it must be for Jasper & Co. to try to convince broker-dealers Primus isn’t the next Ambac (ABK) or MBIA (MBI).
I’ll have to look further into Primus’ plans for muni bond CDSes - though for a brief second, I’ll admit I had a hope that Berkshire Hathaway (BRK) will come in and buy Primus near economic book value to lock up the bond insurance market, as well as a swap portfolio that looks a lot like the one Berkshire itself has been writing.

Because Primus is kind of/absolutely essential to my portfolio, I’ll be doing more on the company shortly as I talk to others and gather more thoughts.

Read the Primus Guaranty Stock Report.

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Disclosure: I own shares of both PRD and PRS.