NEW YORK (Bloomberg) — Primus Guaranty Ltd., the Bermuda-based company that sold banks credit-default swaps protecting $11.8 billion of debt, reported a third-quarter loss of $2 million after settling contracts with a unit of bankrupt Lehman Brothers Holdings Inc.

The five cents a share loss, which excludes gains in market value on its credit swaps, narrowed from a deficit of $9.6 million, or 23 cents a share, a year earlier, according to a statement yesterday. When accounting for changes in the swaps' market value, Primus had net income of $229 million, compared with net income of $461.5 million in the third quarter of 2009.

Primus is unwinding its credit swaps business after being shut out of the market in 2008 during the financial crisis that toppled Lehman, Washington Mutual Inc. and other financial companies it bet on.

Chief executive officer Thomas Jasper left the firm this month and was replaced by Richard Claiden, its chief financial officer since 2003. The change was part of the company's plan to cut expenses as it seeks to finish collecting premiums as contracts expire and return capital to shareholders.

The company agreed to pay $17.5 million to the Lehman unit to settle $1.1 billion of swaps that Primus had sold to the firm, according to a regulatory filing and today's statement. Lehman filed for bankruptcy in September 2008.

Primus fell 10 cents to $4.91 in New York Stock Exchange composite trading yesterday. The stock is up 68 percent this year after more than doubling in 2009.

The company yesterday said its swaps unit will have to pay an estimated $2 million on contracts that guaranteed against a default by Ambac Financial Group Inc., the bond insurer that filed for bankruptcy protection this week.

The contracts insured so-called bespoke tranches that investors used to bet on a group of companies.

Primus, which has been capping potential losses from bond insurer defaults by terminating contracts after negotiating discounted payments, also bought $4 million of protection on Ambac, according to the statement, a trade that helped to avoid a larger loss.

Credit-default swaps, which are used to hedge against losses or to speculate on a company's ability to repay its debt, pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent.