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AIG-BAM Terminate Rate Swap Deal

Zacks Equity Research

Recently, leading insurer, American International Group Inc. (AIG) declared that it will scrap the interest rate swap deal with a global alternative asset manager, Brookfield Asset Management Inc. (BAM) to resolve a dispute in the agreement. In exchange it will receive $905 million from Brookfield Asset Management.

As per sources, Brookfield Asset Management had filed a lawsuit in 2009 against American International claiming that the latter’s financial collapse in Sep 2008 had brought about default provisions in two 25 year rate swaps executed by Brookfield in 1990. On the other hand, against the allegation, American International Group stated that this lawsuit was an attempt on part of Brookfield Asset Management to get rid of the payout to the former.

The swap agreement was part of the remaining derivatives portfolio of American International’s Financial Products. American International has been trying to reduce risks associated with the lawsuits filed against it for quite some time now. Amid the ongoing economic volatility, termination of the interest rate swap agreement is expected to help the company to reduce risk to some extent.

As of Jun 30, 2013, Brookfield had a liability of approximately $1.4 billion and was subject to litigation in the United States District Court for the Southern District of New York. The termination of the agreement will dismiss this lawsuit against the company thereby retaining investor confidence.
In addition to reducing risks, American International is also focused in reducing its debt burden and enhancing financial flexibility. Earlier this month, American International declared that it will redeem its outstanding 3.65% notes worth $500 million next month, much earlier than the scheduled expiry in 2014. The liability management initiatives taken up by American International have also helped it reduce debt by $931 million in the second quarter of 2013, reported this month.

American International currently carries a Zacks Rank #2 (Buy). Among other insurers in the industry, AXA Group (AXAHY) carries a favorable Zacks Rank #1 (Strong Buy) while CNO Financial Group Inc. (CNO) carries a Zacks rank #2 (Buy).

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