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AIG's Hancock: Icahn breakup proposal is a 'distraction'

American International Group CEO Peter Hancock told CNBC on Tuesday that activist investor Carl Icahn's call for the insurance giant to split up its business would be a distraction and increase the company's capital requirements.

Icahn last week disclosed a large stake in AIG. In an open letter to Hancock, Icahn said the company was still loo large despite years of dismantling.

Icahn said AIG should immediately separate its life and mortgage insurance subsidiaries to create three independent public companies. He also called for a "much needed cost control program to close the gap with peers."

U.S. regulators classify AIG as a systemically important financial institution, or SIFI, a designation that carries special regulatory burdens.

Read More Carl Icahn takes stake in AIG, demands company break itself up

Hancock said AIG's focus is growing the company, cutting costs and removing the SIFI label would be a distraction.

"We certainly think that cutting costs is a very important priority for the company, and we think returning capital is very important for the company. To do so, however, splitting the company would actually increase the capital required because the rating agencies are the the binding constraint, as opposed to the designation as SIFI," he said in a "Squawk on the Street" interview.

"As both Moody's and S&P have said in their recent publications, having a life and property, casualty business together and the international diversification reduces the amount of capital that we need to serve our 90 million customers around the world."

AIG will meet with Icahn at his office on Thursday to discuss the proposal, he added.

"I look forward to hearing how he'll elaborate on those views, and I hope he'll listen to what we have to say about the company," Hancock said. "It's a large company with a lot of moving parts, and we have important tax issues that he needs to understand to understand the pros and cons of different strategic choices."

AIG has "significant" foreign tax credits and a net operating loss to carry forward, and thus would endanger up to $5 billion out of its total $15 billion tax attributes if it did split its life and property casualty businesses, he said.

Hancock made his comments one day after AIG reported quarterly earnings that fell well short of analysts' expectations.

Read More AIG earnings miss Street's most dismal estimates

— CNBC's Reem Nasr contributed to this story.