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UPDATE 3-AIG lures industry veteran Duperreault as CEO with sweet package

(Adds details on pay package, acquisition and partnerships, updates share price)

NEW YORK, May 15 (Reuters) - American International Group Inc on Monday named an insurance industry veteran as its new chief executive officer, luring him from the firm he started with a lucrative financial package that includes buying a big piece of his company.

In hiring Brian Duperreault, who is 70, AIG is giving into the demands of billionaire investor Carl Icahn, AIG's fourth largest shareholder, who has been pushing for big changes at the insurance giant.

Duperreault's appointment caps more than two months of uncertainty for shareholders since outgoing CEO Peter Hancock suddenly announced in March he would step down, citing a lack of confidence from the board and investors.

"Very pleased the AIG board is finally making some of the much-needed changes we've been advocating the last 18 months," Icahn tweeted.

AIG's shares rose as much as 1.4 percent, and in early-afternoon trading were up 0.8 percent at $61.50.

AIG said it will pay as much as $40 million to free Duperreault from a noncompete agreement with Hamilton Insurance Group Ltd, the firm he founded and ran, in addition to a $16 million annual pay package.

AIG also agreed to buy Hamilton's U.S. business, a technology-driven group of insurance companies, for $110 million, and create a partnership with an affiliate of quantitative investment firm Two Sigma Insurance Quantified LP to expand into data mining and analytics.

A growing number of insurers are embracing data mining to help price products more effectively and better assess and manage risks.

The initiatives will put AIG at "the forefront of the industry," Duperreault told investors on Monday.

AIG will partner with Hamilton's reinsurance business in a deal that could spark "material premium growth" for Hamilton Re, and provide AIG with a fresh source of reinsurance capital, AIG said.

"Putting data science and technology to work in our industry has been on my agenda for some time," Duperreault said in a statement.

Bermuda-born Duperreault spent many years at AIG earlier in his career, becoming a protégé of former longtime CEO Hank Greenberg. After leaving AIG in 1994, Duperreault built a reputation as an expert in growing small companies and righting troubled ones.

He built ACE Group Inc from a small outfit to a global operation, then launched a successful turnaround as president and CEO at Marsh & McLennan Cos Inc before founding Hamilton.

Duperreault's age suggests he may only stay at AIG for three to five years, several recruiters said in interviews. The company is nearly three-quarters through a turnaround plan that he will guide to completion while grooming a successor, they said.

"Brian is uniquely qualified to lead AIG at this important time," Douglas Steenland, chairman of AIG's board, said in a statement. "He is a hands-on leader who has consistently delivered strong bottom-line results."

AIG's turnaround plan was intended to trim the New York-based insurer through divestitures, improve its financial performance and return $25 billion in capital to shareholders.

Hancock, the previous CEO, developed the plan partly in response to demands from Icahn, who had wanted to split the company into three parts.

AIG reported poor fourth-quarter results in February, prompting Hancock to step down, and analysts and investors wondered whether the idea was under consideration again. However, at an event on Monday for investors, Duperreault said it is off the table.

"I didn't come here to break the company up," he said. "I came here to grow it."

AIG has spent more than $18 billion buying back stock since Hancock detailed the $25 billion goal. The board authorized $2.5 billion in new share repurchases last month.

Duperreault's appointment could test whether possible internal candidates for the CEO job will stay.

The most prominent was Rob Schimek, CEO of AIG's commercial insurance unit, who joined the company in 2005 as chief financial officer.

Industry sources describe Schimek, age 52, as capable and accomplished, though he lacks Duperreault's turnaround experience. During his time at AIG, Schimek helped ink reinsurance pacts with Swiss Re AG and Berkshire Hathaway Inc to offset long-term risks on U.S. commercial insurance policies. (Additional reporting by Sweta Singh in Bengaluru; Editing by Chris Reese and Jeffrey Benkoe)