(Bloomberg) -- Carl Icahn, the billionaire investor known forpicking fights with corporate boards, disclosed an investment inAmerican International Group Inc. and said it should split intothree companies, one offering property- casualty coverage, anotherselling life insurance and a third backing mortgages. The stockrallied in New York trading.

“There is no more need for procrastination,” Icahn said in aletter posted on his website Wednesday and addressed to AIG ChiefExecutive Officer Peter Hancock.“The time to act is now.” Icahnsaid on Twitter that he holds a “large stake” in AIG.

While AIG climbed about 8.8 percent this year through Tuesday’sclose, the insurer still trades for less than 80 percent of bookvalue, a measure of assets minus liabilities. Travelers Cos., thelone property-casualty insurer in the Dow Jones Industrial Average,trades for more than 1.4 times book value. AIG jumped 2.8 percentto $62.65 at 11:48 a.m., the most intraday since August.

Icahn, 79, said a tax-free separation into independent publiccompanies would help AIG limit regulation. The U.S. has deemed theNew York-based insurer as a systemically important financialinstitution, or SIFI, because of its size. The designationbrings increased Federal Reserve oversight.

AIG reorganization

“Enhanced regulation is intended to be a tax on size,” Icahnwrote in the letter. “In the face of a changing and potentiallypunitive regulatory framework, you must realize that insurancebusinesses of AIG’s caliber are more valuable to shareholders ifheld directly than they are as part of a SIFI conglomerate.”

Hancock, 57, who took over as CEO last year, reorganized AIGinto two main divisions with one focusing on commercial clients andthe other on individual consumers. He said the arrangement respondsto customer demand and makes more sense than the previous split,which had a life unit and a property- casualty operation. AIG alsohas been divesting assets to boost capital, exiting its stake inaircraft-lessor AerCap Holdings NV and selling shares ofconsumer-finance company Springleaf Holdings Inc.

The insurer has “taken important and significant steps toreposition AIG by both simplifying and de-risking the company,”Hancock said in a statement. “We remain on course and aredetermined to continue and accelerate these efforts.”

Paulson, McGee

John Paulson, the billionaire hedge fund manager who is also anAIG investor, is quoted in the letter saying that the insurer couldtrade for more than $100 a share if it split into three, reducedexpenses, repurchased stock and matched average industry returns.Paulson in 2012 urged Liam McGee, then the CEO of HartfordFinancial Services Group Inc., to separate its life insurer fromthe property-casualty operation.

McGee subsequently sold assets to simplify his company and wonpraise from Paulson. Travelers and life insurer PrudentialFinancial Inc. are among AIG rivals that sold units in prior yearsto narrow their focus.

‘Frankly overdue’

“AIG is frankly overdue in following in the footsteps of allother major multi-lines in breaking up life and P&C,” Paulsonis quoted as saying in the letter.

General Electric Co., whose finance unit is one of four non-bankSIFIs, has announced more than $120 billion of divestitures as CEOJeffrey Immelt refocuses on industrial products spanning jetengines, oilfield equipment and locomotives. Immelt plans to applyto exit from SIFI status, a designation that could bring toughercapital, leverage and liquidity requirements.

Asked in a May earnings call if he would consider a similarstrategy to escape SIFI status, Hancock said he needed more clarityon how the rules would be applied.

“Should you get off this off-ramp, there’s 200 other regulatorsthat are also very interested in how we run the company,” Hancocksaid at the time. “So it’s not clear to me that getting off thatoff-ramp changes management’s flexibility in any material way.”

Credit raters

AIG believes that its needs for holding capital are driven byratings firms, not just government watchdogs, and would still besubstantial if the company were split, said a person familiar withthe insurer’s thinking. Intra-company guaranties would make it hardto split the businesses, and AIG would lose the advantage ofcross-selling some products to corporate clients, especiallyoutside the U.S., said the person, who asked not to be identifieddiscussing internal deliberations.

In addition to distributing AIG’s debt among new companies,another barrier would be how to manage tax assets that the insureraccumulated because of losses in the financial crisis. Such assetscan be used to lower obligations in future years.

While splitting the company would save costs, the process wouldbe complicated, and the loss of diversity could jeopardize AIG’scredit rating, Meyer Shields, an analyst at Keefe Bruyette &Woods, said in an interview.

“The financial structure would take an awful lot of work to getthrough,” he said. “Management seems to think there’s a benefit tokeeping them together.”

Greenberg’s approach

AIG was built into the world’s largest insurer by former CEOMaurice “Hank” Greenberg, who added life operations and theaircraft business partly to counter the fluctuations of propertyand casualty operations. Results in those lines can swing widelybased on the frequency of natural disasters or changes inprices.

The insurer’s size was seen as a hindrance in the financialcrisis, after Greenberg had departed, when the company almostcollapsed because of losses on mortgage-related derivatives betsand was bailed out by the U.S. in a rescue that swelled to $182.3billion.

Hancock’s predecessor at AIG, Robert Benmosche, sold somenon-U.S. life operations to help repay the bailout. Still, heresisted calls in 2011 for a breakup, saying the insurer benefitsfrom having a variety of businesses.

Icahn has staged campaigns at companies including Hertz GlobalHoldings Inc., Gannett Co., Family Dollar Stores Inc. and EBay Inc.since the beginning of 2014. This month he got his way atFreeport-McMoRan Inc., the world’s largest publicly traded copperproducer, which announced it was naming two of his associates toits board.

--With assistance from Beth Jinks in San Francisco.

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