(Adds details on job cuts, background; updates shares)
Jan 26 (Reuters) - American International Group Inc said it would spin off its mortgage insurance unit, cut jobs and sell its broker-dealer network as part of a sweeping overhaul promised to shareholders to fend off activist investor Carl Icahn.
The insurer said in a statement on Tuesday that it plans to cut $1.6 billion of costs and return at least $25 billion to shareholders over the next two years.
In a separate filing, AIG said it had frozen its pension plan and let about 300 of its "top 1,400 employees" leave. Further job cuts are planned this year.
Shares of the biggest U.S. commercial insurer by premiums rose about 2.5 percent in premarket trading.
As rock-bottom commercial property and casualty insurance rates across the industry have battered underwriting, AIG's cost structure has been a worry for investors.
Tensions have been mounting between Chief Executive Peter Hancock and Icahn over the billionaire's repeated suggestion that the insurer should split into three - an idea that Hancock has rejected.
Instead, AIG said it planned to streamline its business through divestitures, including the sale of AIG Advisor Group, a network of independent broker-dealers, to Lightyear Capital LLC and PSP Investments.
It will also sell up to 19.9 percent of United Guaranty Corp in mid-2016 as a first step toward separating the business.
AIG said it would overhaul its operational structure, making it easier to take parts of its commercial or consumer businesses public or to sell them if they underperform.
Pressure across the insurance industry to slim down was highlighted this month when MetLife Inc, the largest U.S. life insurer, said it would split a substantial portion of its U.S. retail business due to the "regulatory environment."
AIG's near collapse in 2008 and the government bailout that followed drove regulators to consider some non-bank companies as "too big to fail."
A break-up of the company would remove that regulatory burden. Icahn also believes this would allow AIG to return $20 billion in capital to shareholders without affecting credit ratings, the Wall Street Journal reported in October. (http://on.wsj.com/1MirVQy)
Sticking to AIG's stance, Non-Executive Chairman Douglas Steenland said in the statement: "A full break-up in the near term would detract from, not enhance, shareholder value."
Icahn was not immediately available for comment. In November, he disclosed a 3.4 percent stake in AIG, making him the insurer's fifth-largest shareholder, according to Thomson Reuters data.
(Reporting by Richa Naidu in Bengaluru and Michael Flaherty in New York; Editing by Robin Paxton)