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First on CNBC: CNBC Transcript: AIG CEO Peter Hancock Speaks with CNBC’s David Faber on “Squawk on the Street” Today

WHEN: Today, Tuesday, January 26th

WHERE: CNBC's "Squawk on the Street"

Following is the unofficial transcript of a FIRST ON CNBC interview with AIG CEO Peter Hancock on CNBC's "Squawk on the Street" (M-F, 9AM-11AM ET) today. Following is a link to the video on CNBC.com: http://video.cnbc.com/gallery/?video=3000488995.

All references must be sourced to CNBC.

DAVID FABER: AS OUR VIEWERS MAY ALREADY KNOW, AIG UNVEILING A BROAD-RANGING PLAN THIS MORNING TO STREAMLINE ITS BUSINESS SAYING IT WILL SPIN OFF 19.9% OF ITS MORTGAGE GUARANTEE BUSINESS, CUT 1.6 BILLION OF EXPENSES, RETURN 25 BILLION TO SHAREHOLDERS OVER THE NEXT TWO YEARS, AND A LOT MORE. HERE TO GIVE US A LOT OF THE DETAILS IS AIG CEO PETER HANCOCK. NICE TO HAVE YOU BACK HERE.

PETER HANCOCK: MORNING, DAVID.

FABER: YOU'VE HAD A BUSY MORNING. SOMETHING ELSE YOU TALKED ABOUT A GREAT DEAL, AND I HAVE NOT HEARD THIS WORD ASSOCIATED WITH CORPORATE AMERICA TYPICALLY, MODULAR. THE IDEA – WELL, YOU EXPLAIN WHAT THAT MEANS TO YOUR INVESTORS AND OUR VIEWERS OUT THERE. WHAT ARE YOU TALKING ABOUT WHEN YOU SAY YOU'RE GOING TO MODULARIZE YOUR BUSINESS?

HANCOCK: WELL, WE'RE COMMITTED AT AIG TO BE MORE TRANSPARENT ABOUT WHERE WE ARE MAKING MONEY, WHERE WE STILL HAVE WORK TO DO. SO BREAKING DOWN THIS COMPANY THAT SERVES 90 MILLION CUSTOMERS IN 90 COUNTRIES INTO BITE-SIZED CHUNKS. AND WE ARE ANNOUNCING NINE MODULAR BUSINESS UNITS IN A WAY THAT BRINGS GREATER TRANSPARENCY TO WHERE WE ALLOCATE CAPITAL, THE RETURN ON CAPITAL AND THE FULLY LOADED EXPENSE THAT GOES WITH EACH OF THOSE ACTIVITIES, WE THINK WILL HELP INVESTORS UNDERSTAND THE PROGRESS THAT WE ARE MAKING TO MAKE THIS A MORE FOCUSED AND MORE PROFITABLE COMPANY.

FABER: HOW LONG IS THAT GOING TO TAKE?

HANCOCK: SO WE ARE ANNOUNCING THESE NINE INITIAL MODUALS. WE WILL BE ADDING TO THEM OVER TIME, BUT WE WILL BE DISCLOSING THESE MODUALS DURING 2016 IN TERM OF THEIR FULLY ALLOCATED EXPENSE AND CAPITAL STRUCTURE. SO INVESTORS WILL HAVE THE INFORMATION TO JUDGE OUR PROGRESS.

FABER: YOU SAY, OF COURSE, IT GIVES YOU THE FLEXIBILITY AT SOME POINT, IF YOU CHOOSE TO, TO DISPENSE OF THEM, IF YOU WILL, OR TO FIGURE OUT A WAY TO SPIN THEM OR SELL THEM, I SUPPOSE. BUT THAT IS NOT THE INTENT AT THIS POINT. YOUR INTENT IS TO KEEP THIS COMPANY TOGETHER AS IT IS OTHER THAN THE ADVISORY BUSINESS, WHICH IS A SMALL BUSINESS BEING SOLD IN THE 19.9 OF THE MORTGAGE BUSINESS.

HANCOCK: I THINK THIS IDEA OF MODULARITY HAS MANY FUNCTIONS. IT CERTAINLY GIVES YOU THE STRATEGIC FLEXIBILITY TO SELL, SHOULD A BUYER COME IN WITH A PRICE THAT IS SO COMPELLING THAT IT OVERCOMES THE TAX ISSUES, THE DIVERSIFICATION ISSUES THAT MAKE THE MIX OF BUSINESSES THAT WE HAVE THAT ARE IMPORTANT. BUT EVEN AS A CONTINUED GROWING BUSINESS, JUST LIKE A COMPANY LIKE GOOGLE, WHICH WENT MODULAR BY CREATING ALPHABET, IT CREATES MORE TRANSPARENCY AROUND WHICH BUSINESSES ARE THE CASH COWS PRODUCING CURRENT EARNINGS VERSUS WHICH ARE THE GROWTH AREAS WHERE YOU HAVE TO TAKE A LONGER TIME HORIZON BEFORE THE ROEs HIT TARGET LEVELS.

FABER: YOU ADDED $3.6 BILLION TO RESERVES. WHY?

HANCOCK: SO WE'RE IN THE BUSINESS OF ENSURING LARGE, COMPLEX RISKS OVER LONG TIME HORIZONS. THE U.S. CASUALTY BUSINESS IS A SOURCE OF THE RESERVES. THEY HAVE ABOUT $58 BILLION OF RESERVES IN TOTAL. WE ADDED ABOUT 6% TO THAT NUMBER IN THE FOURTH QUARTER. WE ANNOUNCED THAT AT THE SAME TIME AS OUR STRATEGIES TO GIVE PEOPLE CONFIDENCE THAT WE HAVE A CAPITAL BASE AND RESERVES THAT CAN REASSURE OUR CUSTOMERS THAT WE ARE GOOD FOR OUR LONG TERM PROMISES. AND IT SHOULD GIVE GREATER STABILITY TO FUTURE EARNINGS WITH FEWER CHANCES OF ADVERSE DEVELOPMENT IN RESERVES.

FABER: YOU KNOW, YOU WERE ASKED ON THE CALL, THOUGH, ARE YOU GETTING MORE CAUTIOUS? AND I WILL ASK THAT QUESTION BECAUSE ONE DOES WONDER WELL, WHY NOW AS OPPOSED TO AT A DIFFERENT POINT IN TIME?

HANCOCK: WELL, WE ARE ALWAYS REVIEWING THE RESERVE ADEQUACY AND THE CAPITAL STRUCTURE OF THE COMPANY. OUR CLIENTS AND OUR REGULATORS THAT FACE OFF OF THOSE CLIENTS – THE STATE REGULATORS, FEDERAL REGULATORS, INTERNATIONAL REGULATORS – WANT TO KNOW THAT WE HAVE A PRUDENT CAPITAL STRUCTURE THAT SERVES ALL OF OUR STAKEHOLDERS WHILE AT THE SAME TIME, WE ARE VERY ANXIOUS TO ALSO SERVE OUR SHAREHOLDERS WITH TOP QUARTILE TOTAL SHARE OF RETURN. SO IT'S BALANCING THE INTEREST OF ALL OF THESE STAKEHOLDERS THAT GOES INTO OUR THINKING HERE.

FABER: WHEN IT COMES TO REGULATORS, YOU HAVE MADE THE POINT WITH ME IN A PREVIOUS INTERVIEW COMBATING POINTS MADE BY MR. ICAHN, ONE OF YOUR LARGEST SHAREHOLDERS, THAT ACTUALLY YOU BENEFIT FROM THE REGULATORY REGIME BEING A LARGER COMPANY. HE'S STILL COMING AT YOU. HE'S STILL SAYING IN FACT THAT HE DOES NOT BELIEVE THAT TO BE THE CASE. WHY IS IT STILL, IN YOUR OPINION, THE RIGHT WAY TO GO IN TERMS OF NOT PURSUING THE DECERTIFICATION, IF YOU WILL, AS A SIGNIFICANTLY IMPORTANT FINANCIAL INSTITUTION?

HANCOCK: WELL, AS AN INSURANCE COMPANY OPERATING ALL OVER THE WORLD, WE ARE SUBJECT TO THE REGULATIONS OF ALL OF THE U.S. STATES, FOREIGN JURISDICTIONS, THE FED IS JUST ONE OF MANY REGULATORS. AND AS WE LOOK AT WHAT THE BENEFITS AND THE COSTS OF COMPLYING WITH ALL OF THESE REGULATORS ARE, WE JUDGE THAT OUR CURRENT SITUATION AS A SIFY, IS A MODEST COST. ROUGHLY $100 TO $150 MILLION PER YEAR OF COMPLIANCE COST. AND COMPARED TO THAT, THE BENEFITS OF HAVING A DIVERSE COMPANY, BOTH IN TERMS OF TAX, WHICH IS ABOUT $1.3 BILLION OF TAX BENEFITS BY HAVING OUR LIFE AND PROPERTY CASUALITY TOGETHER. BUT MORE BROADLY OUR DIVERSIFICATION, WHICH IS A $5 TO $10 BILLION CAPITAL BENEFIT, FAR OUTSTRIPS ANY POTENTIAL HYPOTHETICAL BENEFITS OF SPLITTING THE COMPANY IN THE HOPE THAT THAT WOULD LEAD TO DECERTIFICATION AS A SIFY.

FABER: CARL ICAHN, PAULSON AND COMPANY HAVE BEEN VOCAL IN TERMS OF THEIR BELIEF THAT THE COMPANY SHOULD BE SPLIT. ALSO JOINED BY AN ANALYST AT SANFORD BERNSTEIN. I HAD HIM AS A GUEST YESTERDAY TO SORT OF GIVE A SENSE AS TO EXPECTATIONS FOR TODAY'S ANNOUNCEMENT. BUT I WOULD LIKE YOU TO RESPOND TO JOSH STIRLING FROM BERNSTEIN AND WHAT HE SAID YESTERDAY ABOUT THE SIZE OF THE COMPANY. TAKE A LISTEN.

SOUND FROM JOSH STIRLING, SANFORD BERNSTEIN: I THINK THE FUNDAMENTAL PROBLEM THE COMPANY HAS IS IT'S JUST – AND I THINK THIS WAS AN ICAHNISM, IT'S TOO BIG TO SUCCEED. AND IF YOU THINK ABOUT THAT FROM AN OPERATIONAL PERSPECTIVE, THEY HAVE TOO MANY DIFFERENT DIVISIONS, THEY HAVE TOO MUCH SPRAWLING – YOU KNOW, TOO LITTLE FOCUS AT THE COMPANY – AND THEN FROM A REGULATORY PERSPECTIVE, THIS COMPANY HAS SUFFERED, YOU KNOW, I MEAN IT'S BEEN AT THE ROOT OF SO MUCH OF SORT OF WHAT OFFICIALLY ILLS WALL STREET…THEY DELIVER FAR LOWER MARGINS AND THEY SIMPLY DON'T MEET PEER RETURNS.

FABER: FAR LOWER MARGINS, DON'T MEET PEER RETURNS AND THE PROBLEM IS YOU'RE SIMPLY TOO BIG TO SUCCEED.

HANCOCK: SO AIG IS A MUCH SMALLER COMPANY THAN IT WAS BEFORE THE FINANCIAL CRISIS AND WE HAVE BEEN NARROWING ITS FOCUS ON WHAT IT DOES BEST. BUT OUR CLIENTS DEPEND ON OUR SCALE TO DEAL WITH VERY IMPORTANT ISSUES. JUST GIVE YOU BY WAY OF EXAMPLE – SUPERSTORM SANDY AFFECTED THIS NEIGHBORHOOD VERY MASSIVELY. AIG PAID APPROXIMATELY $2.5 BILLION TO PUT LOWER MANHATTAN BACK ON ITS FEET AGAIN. SERVING CLIENTS LIKE NEW JERSEY TRANSIT, THE MTA, CON-ED, VERIZON AND COUNTLESS OTHERS, AND SMALL AND MEDIUM COMPANIES. THE NEAREST PEER WAS A QUARTER OF THAT SIZE. SO THE INDUSTRIAL INFRASTRUCTURE OF THIS COUNTRY AND OVERSEAS JURISDICTIONS THAT WE OPERATE IN VIEW AIG AS A CRITICAL PART OF HOW TO INSURE AGAINST ADVERSE EVENTS. IF YOU BREAK UP THIS COMPANY, YOU GO AT THE HEART OF ONE OF OUR MOST IMPORTANT SOURCES OF VALUE ADDED. SO BEFORE YOU CALIBRATE US AGAINST PEERS, YOU'VE GOT TO CHOOSE THE RIGHT PEERS. AND I THINK THAT OUR TOTAL SHARE OF RETURN, WHICH IS WHAT OUR SHAREHOLDERS CARE ABOUT MOST, HAS BEEN TOP QUARTILE OVER THE LAST YEAR, OVER THE LAST THREE YEARS AND WE INTEND IT TO STAY THAT WAY OVER THE NEXT TWO.

FABER: HAS MR. ICAHN'S AGITATION PERHAPS PRESSURED YOU TO MOVE MORE QUICKLY THAN YOU OTHERWISE WOULD HAVE?

HANCOCK: WE LAID OUT A PLAN A YEAR AGO THAT HAS A THREE YEAR TIME HORIZON. WE'VE CERTAINLY BEEN LISTENING TO ALL OF OUR SHAREHOLDERS THAT HAVE EXPRESSED A DESIRE FOR MORE TRANSPARENCY ON HOW WE ARE DOING AND STEPPED UP THE LEVEL OF OPENNESS ABOUT PROGRESS AND OUR COST INITIATIVES, FOR INSTANCE, ARE ON TRACK THIS FIRST YEAR OF THE THREE-YEAR PERIOD, 3% DOWN IN COSTS. AND NEXT YEAR, WE'LL HAVE ABOUT A 6% REDUCTION IN COSTS AT THE UPPER END OF THE RANGE OF OUR INITIAL PROJECTIONS. SO YES, THERE'S A SENSE OF URGENCY TO DELIVER OUR RESULTS AS QUICKLY AS WE CAN.

FABER: DOES THAT GET MOVED UP WHEN YOU HAVE A LARGE ACTIVIST WHO IS HAPPY TO SEND OFF SCATHING LETTERS ALL OF THE TIME?

HANCOCK: THIS COMPANY HAS KEPT ITS EYE ON THE BALL THROUGH A NUMBER OF YEARS WHERE MANY PEOPLE HAD OPINIONS ON HOW THIS COMPANY SHOULD RUN BETTER OR HAD THEIR OWN VIEWS ON HOW WE SHOULD DO THINGS. IF WE LISTEN TO OUR CLIENTS AND DO WHAT THEY NEED, WE WILL MEET OUR AMBITION TO BE OUR CLIENTS' MOST VALUED INVESTOR – INSURER – AND WE'LL DEAL WITH OUR INVESTORS AND OTHER STAKEHOLDERS IN A WAY THAT DELIVERS OUR PROMISES TO THEM AS WELL.

FABER: YOU RETURNED 12 BILLION TO SHAREHOLDERS LAST YEAR AND YOU'RE PLANNING ON ANOTHER 25 BILLION OVER THE NEXT TWO YEARS. AS A PERCENTAGE OF A ROUGHLY 70 BILLION MARKET CAP, THAT'S AN AWFUL LOT. WHY THAT NUMBER? WHY NOT LESS, WHY NOT MORE? WHY IS IT 25 BILLION, WHICH IS IN KEEPING, WOULD SEEM AT LEAST, WITH WHAT YOU DID LAST YEAR.

HANCOCK: SO WE WANT TO MAKE SURE THAT WE USE OUR CAPITAL VERY EFFECTIVELY ON SOLVING OUR CLIENTS' MOST IMPORTANT PROBLEMS. AND THAT MEANS THAT, AS WE SHIFT OUR BALANCE BETWEEN A VERY CAPITAL INTENSIVE BUSINESS MODEL TO A MORE BALANCED MODEL, WHERE WE ARE PROVIDING RISK EXPERTISE AND DATA ANALYTICS, COMPLEMENTS OUR BALANCE SHEET STRENGTH IN A WAY THAT CREATES SUSTAINABLE AND COMPETITIVE ADVANTAGE, AND AS WE USE THIRD-PARTY CAPITAL IN ALTERNATIVE CAPITAL SOURCES AND REINSURANCE, WE CAN RUN THIS FRANCHISE WITH LESS CAPITAL WHILE MAINTAINING OUR FINANCIAL STRENGTH AT A LEVEL THAT BACKS UP OUR LONG-TERM PROMISES.

FABER: HAVE YOU HEARD FROM EITHER MR. ICAHN OR MR. PAULSON'S TEAM AT ALL THIS MORNING SINCE THE ANNOUNCEMENT?

HANCOCK: NO, WE HAVE NOT.

FABER: DO YOU EXPECT TO MEET WITH MR. ICAHN AT SOME POINT TO DISCUSS WHAT YOU HAVE DONE TODAY AND SEE WHAT HIS PLANS ARE?

HANCOCK: WE WILL BE VERY BUSY OVER THE NEXT FEW WEEKS DISCUSSING OUR PLANS WITH ALL OF OUR INVESTORS, AND WE'RE ALWAYS OPEN TO GOOD IDEAS WHEREVER THEY MAY COME FROM.

FABER: MR. HANCOCK, WE APPRECIATE YOUR KEEPING US UPDATED. THANK YOU FOR JOINING US.

HANCOCK: DAVID, IT IS MY PLEASURE.

FABER: PETER HANCOCK, THE CEO OF AIG.

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