(Bloomberg) -- American International Group Inc., the largest commercial insurer in the United States and Canada, said first-quarter profit fell 27 percent as claims costs climbed at the property/casualty business. The stock dropped in extended trading.

Net income declined to $1.61 billion, or $1.09 a share, from $2.21 billion, or $1.49, a year earlier, New York-based AIG said yesterday. Operating profit fell 26 percent to $1.16 billion at the property/casualty business.

Chief Executive Officer Robert Benmosche, 69, is shifting the business mix and cutting jobs as he works to improve results at the property/casualty unit. The CEO has used dividends and repurchases to reward shareholders who’ve helped recapitalize AIG as the company emerged from the U.S. rescue that it repaid at the end of 2012.

Also see: AIG on Offense After Restoring Brand Name, Chairman Says

“This is another quarter that has yet to show headline progress,” Josh Stirling, an analyst at Sanford C. Bernstein & Co., said by phone. “The market is looking at the fact that they had an underwriting loss in the quarter.”

AIG slipped 2.8 percent to $51.25 at 6:35 p.m. in New York yesterday. The company has advanced about 18 percent in the past 12 months, beating the 17 percent gain of the Standard & Poor’s 500 Index.

AIG paid out $1.01 in claims and expenses for every premium dollar it took in at the property-casualty division during the first quarter, compared with costs of 97.3 cents a year earlier. The underwriting loss was $97 million.

Catastrophe Costs

Catastrophes cost AIG $262 million, compared with $41 million a year earlier. Winter weather in the U.S. fueled claims for the industry tied to burst pipes, slick roads and roof collapses.

The property/casualty unit is overseen by Peter Hancock and insures commercial property, corporate boards and airplanes. It posted a 1.2 percent decrease in sales to $8.33 billion. Sales rose 1.9 percent to $5 billion at the commercial operation, while currency fluctuations contributed to a 5.5 percent decline at the consumer segment.

“We remain diligently focused on increasing operational efficiency, managing our expenses, and investing in technology,” Benmosche said in the statement. “We must continue to develop and grow our company so that it is more sustainable.”

Underwriting Losses

Benmosche announced a plan in February to cut AIG’s staffing by about 3 percent and has been moving workers to lower-cost locations such as Amarillo, Texas. AIG hasn’t posted an underwriting profit at the property/casualty operation since the first quarter of last year.

At the life and retirement unit led by Jay Wintrob, operating profit increased to $1.42 billion, from $1.39 billion, as higher sales and assets under management cushioned a decline in investment income. Premiums, deposits and other considerations jumped 28 percent to $7.13 billion.

The insurer got more than half its profit last year from the life and retirement unit, which offers annuities, mutual funds and insurance in the U.S. AIG has been expanding sales of the retirement products as rivals such as MetLife Inc. scaled back.

Hedge Funds

AIG’s hedge-fund holdings climbed to $5.65 billion at the life unit from $4.04 billion a year earlier, while private- equity investments fell to $3.24 billion from $3.67 billion. The funds added a total of $479 million to profit, 12 percent more than a year earlier, AIG said in a document on its website.

At the property-casualty unit, hedge-fund investments rose to $4.01 billion, from $3.23 billion. Private-equity bets increased to $3.92 billion from $3.81 billion. Income from the investments rose 4.3 percent to $269 million.

AIG’s operating profit was $1.21 a share, beating the $1.07 average estimate from 24 analysts surveyed by Bloomberg.

Book value, a measure of assets minus liabilities, rose to $71.77 per share as of March 31 from $68.62 three months earlier. The insurer said it repurchased $867 million of its stock in the quarter.

AIG reached an agreement in December to sell its plane- leasing business to AerCap Holdings NV for about $5 billion. The deal for AIG’s International Lease Finance Corp. received all regulatory approvals, AerCap said in a separate filing yesterday. A previous deal for ILFC with a group of Chinese investors fell apart when the would-be buyers failed to deliver funds.

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