NEW YORK (Bloomberg) — Bermuda-based Primus Guaranty Ltd., the only publicly traded company that makes most of its money investing in credit-default swaps, said third-quarter earnings fell 1.2 percent as the company wrote fewer new contracts.Net income was $23.7 million, or 54 cents a share, compared with $24 million, or 54 cents, a year earlier, the Bermuda-based company said yesterday in a statement. Revenue from credit-default swap contracts rose 5.3 percent to $28.9 million. Compensation and employee benefit expenses climbed to $5.02 million from $3.54 million as the companies added more employees and offered higher performance-based incentives.

Primus oversees a credit-default swap portfolio on $15.2 billion in debt securities. Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt.

Excluding unrealised gains and losses from the contracts, which the company typically holds until maturity, profit was $12.7 million, or 29 cents a share, up from $10.4 million, or 23 cents. On that basis, analysts expected profit of 30 cents a share, according to the average estimate of seven analysts surveyed by Thomson Financial, which doesn’t disclose what its estimates include or exclude.

“Good progress was made across all areas of our business with slower but opportunistic growth,” chief executive officer Thomas Jasper said in the statement.

The cost of credit-default swaps on US and European companies has fallen to record lows this month amid gains in corporate profits, low default rates and higher demand from derivatives that pool together the contracts.

The Dow Jones CDX North America Investment Grade index has fallen 20 percent to 32.90 from 41.12 on September 22, according to data compiled by Credit Market Analysis.

The level of the index, which is made up of 125 companies in the US and Canada with investment-grade ratings, means it costs investors an average of $32,900 a year to protect $10 million of bonds for five years.

The ITraxx Europe index of 125 investment-grade companies has fallen 24 percent to 22.80, from 30.62 on September 22.

While lower credit-default swap costs can cut market losses, it also can lead to lower average revenue from new contracts.

The company invested in fewer credit-default swaps because “we don’t believe the risk/return is as attractive to us,” Jasper said on a conference call with analysts.

Primus entered into new contracts on $525 million in corporate and sovereign bonds during the third quarter, down from $1.6 billion a year earlier. Morgan Stanley analyst Ken Zerbe expected $900 million in new contracts, he said in a note to clients. Average revenue from the new contracts was $35,000 a year for every $10 million in face value, down from $41,000.

“Despite falling below our expectations, we would rather have the company slow its new business if it cannot write transactions at more favourable returns,” New York-based Zerbe, who maintained an “overweight” rating on Primus stock, said in the note.

The 29 cents a share in profit excluding unrealized losses was in line with his estimate.

Primus shares fell 19 cents to $11.67 at 4:01 p.m. in New York Stock Exchange trading.

They have fallen 11 percent this year, underperforming the Standard & Poor’s 500 Index, which has gained 11 percent.

The company lost about $1.6 million from its credit-default swaps, largely because of leveraged-buyout offers or speculation of potential offers that tend to boost a company’s perceived credit risk and make outstanding contracts less valuable, Jasper said in the call.

Primus plans to create credit-default swaps contracts on asset-backed securities, mostly on first-lien mortgages, if the credit ratings companies say the move won’t jeopardise its ratings, chief financial officer Richard Claiden said in an interview. Such contracts may help boost returns, Jasper said.

Those contracts “currently offer better risk/return opportunities than the corporate market, and we would like to begin to benefit from this situation,” Jasper said.

Primus, started four years ago, is one of only two so-called credit derivative product companies created to tap into Wall Street’s fastest-growing derivatives market. The other is closely held Athilon Capital Corp.

Credit-default swaps were conceived a decade ago to protect bondholders against default and pay the buyer face value in exchange for the underlying securities should the company fail to adhere to its debt agreements.