This article, originally published at 8:47 a.m. on Tuesday, Jan. 26, 2015, has been updated with analyst commentary and market data.

AIG (AIG) - Get Report, the bailed-out insurer that Carl Icahn wants to break up, outlined a plan Tuesday to return $25 billion to investors while shrinking its portfolio much less than the activist billionaire had urged.

The New York-based company will shed about a fifth of its mortgage-insurance business through a spinoff, sell its broker-dealer business for an undisclosed amount and overhaul its portfolio to create nine modular businesses, which could be sold individually if warranted. The moves, approved by the company's board, are the latest in a standoff between CEO Peter Hancock, and Icahn, who has criticized the company for lagging its peers in the aftermath of the financial crisis, when it sustained major losses in its mammoth property and casualty unit. 

"The board's actions reflect its full support for the plans that Peter Hancock and his management team have put forward," Chairman Douglas Steenland said in a statement. "A full breakup in the near term would detract from, not enhance, shareholder value."

Both Icahn, who holds a 3.4% stake in AIG valued at about $2.34 billion, and John Paulson, with an $808 million position, have been urging the company to split into three leaner segments: property and casualty, mortgages, and life insurance. That strategy would allow AIG to escape the strict government oversight of how it invests capital that accompanies the company's designation as a systemically important financial institution, Icahn has said. 

Hancock, however, said that label isn't a "binding constraint" on returning capital to shareholders, and has created comparatively small expenses. The $25 billion that AIG plans to return to shareholders through dividends and buybacks is in addition to $12 billion last year, and will be generated from operating improvements, divestitures and a modest increase in borrowing, he said.

The SIFI label, introduced by the Financial Stability Board in 2011, is applied to finance companies large enough that their failure would threaten the broader U.S. economy. It's a part of the government's effort to avoid a repetition of the 2008 financial crisis, when the failure of Lehman Brothers investment bank froze global credit markets, and taxpayers funneled roughly $182 billion into AIG to keep it afloat.

AIG's cash return represents about 35% of its current market value, Goldman Sachs analyst Michael Nannizzi said in a note to clients Tuesday, and it factors in a $3.6 billion expense to increase reserves in the last three months of 2015. 

Achieving the company's targets, while less lofty than Icahn's, will nonetheless prove a formidable challenge, Cliff Gallant, an analyst with investment bank Nomura, said in a note to clients. A rocky start to the year for financial markets will make both deals and initial public offerings more difficult, he said, while insurance pricing is flat and may decline, and boosting the bottom line through cost cuts is difficult in a challenging operating environment.

"We expect that the company will remain a SIFI, as much for political reasons as financial," said Gallant, who has a neutral rating on the shares and a $62 price target. "Investment yields may remain weak and earnings, which are equity-market related, are a large unknown."

While AIG climbed 1% to $55.91 in New York trading after the plan was announced, it still trades at a discount of nearly 30% to book value, a figure that measure the per-share worth of a company's assets minus its liabilities. That's a steeper discount than rival MetLife and compares with a premium for both Travelers and the broader S&P 500 Financials Index, according to data compiled by Bloomberg.

Keeping the life insurance and property and casualty businesses within the same company, as AIG's plan does, is important because doing so provides from $5 billion to $10 billion in benefits through balancing periods of high and low payouts in the different units, the company noted. Without that, the individual businesses would be forced to invest more in reinsurance policies to curb the risk from high payouts, as well as increase capital reserves.

Executives said the company will shed up to 19.9% of the stock in its mortgage-insurance unit, United Guaranty, by mid-year, while selling AIG Adviser Group, one of the largest U.S. networks of independent broker-dealers, to private equity firm Lightyear Capital and Canadian pension manager PSP Investments. The deal is expected to close in the second quarter.

"As far as divestitures are concerned, there are no sacred cows," Hancock said in a conference with analysts. "We look at all our businesses through the lens of, 'Would they have more value if they were in the hands of somebody besides ourselves?'"

In keeping with that philosophy, the modular units that AIG is creating-- from Financial Lines to U.S. Group Retirement and Europe Commercial -- will decentralize decision-making and allow the company to more easily take public or sell underperforming units.

The insurer was likely considering many of the changes it announced Tuesday before the intervention of the activists, but that pressure probably pushed executives to act faster and "upped the ante," said Cathy Seifert, an analyst with S&P Capital IQ.

"Icahn obviously didn't get his way, but given the responsibilities this management team has, they acted in a prudent manner," Seifert said in a telephone interview. "They are setting themselves up to take a hard look at the business mix, and I think a more realistic expectation may be that they shed some lines of business that are just not meeting internal benchmarks."

Spinning off part of the company's mortgage-insurance business, but retaining a majority interest as The Wall Street Journal and Reuters reported over the weekend that the company was considering, would be unlikely to eliminate SIFI reserve requirements for either the existing company or the spinoff, Meyer Shields, an analyst with Keefe, Bruyette and Woods, said in a note to clients before AIG's announcement.

Shields also noted that mortgage insurance has boosted the bottom line, unlike the property and casualty business. "Since the beginning of 2013, United Guaranty -- AIG's mortgage insurer -- has generated $888 million of underwriting profits, compared to total P&C underwriting losses of $1.244 billion," he wrote in the note. "To be blunt, mortgage insurance is not AIG's problem."

While executives noted Tuesday that a breakup offers no guarantee of the government's lifting the SIFI designation, AIG wouldn't be the first to use major asset sales to try and free itself from the stricter oversight.

That's exactly why General Electric (GE) - Get Report  is shedding most of its GE Capital lending business, and CEO Jeffrey Immelt said Friday that the company plans to apply this quarter to have the designation removed.