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American International Group Inc. Chief Executive Officer Peter Hancock has a bit of ammo as he meets Thursday with activist shareholder Carl Icahn: The credit market has been on the insurer’s side.

The cost to protect bondholders against an ÌìÃÀÍøÕ¾´«Ã½´«Ã½ default surged on Oct. 28, when Icahn proposed the insurer split into separate companies, and climbed for three more days. The perception of creditworthiness improved in the swaps market Tuesday, when Hancock publicly rebuffed Icahn’s plan.

“It is vital to bear in mind that breaking up ÌìÃÀÍøÕ¾´«Ã½´«Ã½, and leaving it with significantly weaker credit ratings, would be a losing proposition for all,” David Havens, a debt analyst at Imperial Capital, said in a note Tuesday after the insurer’s third-quarter earnings call. “ÌìÃÀÍøÕ¾´«Ã½´«Ã½ in two or three pieces would probably be a weaker-rated credit.”

The cost of protecting ÌìÃÀÍøÕ¾´«Ã½´«Ã½ debt from default over five years has climbed more than 9 basis points since Oct. 27, the day before Icahn announced his plan, to 57 basis points as of 4:03 p.m. in New York, according to prices compiled by Bloomberg.

The swaps typically rise as investor confidence deteriorates and fall as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Systemically Important

A breakup could be negative for the insurer’s credit because ÌìÃÀÍøÕ¾´«Ã½´«Ã½ would lose the benefit of diversification and scale, Moody’s Investors Service said in a note on Monday. The ratings firm also said that ÌìÃÀÍøÕ¾´«Ã½´«Ã½ bondholders are helped by ÌìÃÀÍøÕ¾´«Ã½´«Ã½’s status as a systemically important financial institution, which can bring on tougher capital requirements from regulators. Icahn has said shedding that designation could help ÌìÃÀÍøÕ¾´«Ã½´«Ã½ improve returns.

The billionaire activist investor has a stake in ÌìÃÀÍøÕ¾´«Ã½´«Ã½ and has been focusing on boosting the stock price as he pushes Hancock to divide the business into one company selling life insurance, another offering property-casualty coverage, and a third backing mortgages. In a letter to Hancock last week, Icahn quotes hedge fund investor John Paulson saying that a split could help push shares to more than $100.

Stock markets have embraced Icahn’s push. ÌìÃÀÍøÕ¾´«Ã½´«Ã½ climbed 4.9 percent to $63.89 on the day of Icahn’s letter and fell 4.4 percent on Tuesday. Hancock has said he plans to meet Icahn Thursday.

Imperial’s Havens said splitting ÌìÃÀÍøÕ¾´«Ã½´«Ã½ could improve profitability, which is “not a high bar.” Paulson’s hedge fund believes that better margins could help the creditworthiness of the individual firms, according to a person familiar with the money manager’s thinking.

–With assistance from Mitchell Martin in New York.

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