NEW YORK (Bloomberg) — American International Group Inc., the insurer rescued by the U.S., was cut to "underperform" by KBW Inc. on the prospect that meeting government obligations will wipe out most of common shareholders' value.

"The publicly traded shares are grossly overvalued," said Cliff Gallant, a KBW analyst, in a note to investors today. "Under the current ownership and capital structure, we see little long-term value in the common shares." Gallant said he expects AIG to fall to $6 in 12 months, compared with yesterday's closing price of $44.51.

AIG turned over a stake of almost 80 percent to the US in the 2008 bailout that swelled to $182.3 billion. The New York-based insurer has missed four rounds of dividend payments on a Treasury Department investment of more than $40 billion in preferred shares. Gallant said the Treasury is entitled to a 10 percent annual dividend from AIG, which posted a fourth-quarter loss of about $8.9 billion.

"Even if AIG does report earnings, the income will not be accruing to the common shareholder," Gallant wrote. "After liquidity needs are met, AIG has a legal obligation to the preferred owners to pay this dividend, effectively eliminating any real earnings per share." Gallant previously rated AIG "market perform."

AIG dropped 4.2 percent to $42.65 at 9:35 a.m. in New York Stock Exchange composite trading. The company has advanced about 41 percent this year after falling 97 percent in 2008 and 4.5 percent in 2009. Mark Herr, a spokesman for AIG, declined to comment.

The insurer will focus on repaying the Treasury after completing the sale of two non-US life divisions for $51 billion, chief executive officer Robert Benmosche said in an April 1 interview. The deals, which were announced in March, are expected to be completed by December 31 and will help pay down AIG's debt on a Federal Reserve credit line by the end of this year, the insurer has said.

Treasury is considering a plan to convert AIG preferred shares into common stock and sell the holdings on the open market over two years, a person with knowledge of talks with the insurer said this month. If AIG consents to the strategy and there is sufficient investor demand, the sales could be announced as early as the fourth quarter, the person said.

Shareholders could benefit if the government again revises the bailout to ease the terms for the insurer, a possibility that investors shouldn't count on, Gallant said.

"Considering the government's own debt levels and the general political climate today, we view it is unlikely for the government to accept a form of partial payment, except in a hopeless situation," Gallant said.

AIG will focus on US life insurance and global property- casualty coverage after completing the sales of AIA Group Ltd. to Prudential Plc, and American Life Insurance Co. to MetLife Inc. A return to normal catastrophe costs after calmer-than- average weather in 2009 and a decline in prices for commercial coverage may weigh on results at the Chartis property-casualty unit, Gallant said.

Prudential rose as much as 3.9 percent in London trading after the Times reported the company's biggest shareholder is in talks with investors about a possible breakup of the insurer. Capital Group Cos. has held discussions with Aviva Plc, Resolution Ltd. and an unidentified party about splitting up the UK's biggest insurer, the London-based Times reported, without saying where it got the information.