American International Group Inc., the insurer that repaid a U.S. rescue last year, agreed to accept $905 million from Brookfield Asset Management Inc. to resolve a dispute tied to interest-rate swaps.

Brookfield, Canada’s largest alternative-asset manager, said the payment will terminate the swaps and bring the dismissal of litigation in federal court in New York, according to a statement issued yesterday. Toronto-based Brookfield had booked a liability of about $1.4 billion on the contracts as of June 30, according to the statement.

Brookfield sued New York-based AIG in 2009, saying that the insurer’s collapse the prior year had triggered default provisions in two 25-year interest-rate swaps from 1990. AIG, which was bailed out by U.S. taxpayers in 2008, had said Brookfield was seeking to avoid its obligations.

“It is our position that no termination event has occurred and that the swap agreement remains in effect,” AIG said in a regulatory filing this month.

AIG gained less than 1 percent to $47.39 yesterday in New York, and has advanced 34 percent this year. Brookfield fell 0.5 percent to C$36.80 in Toronto and has climbed 4 percent in 2013.

The two companies reached a settlement after negotiating outside of court, Andrew Willis, a spokesman for Brookfield, said in a phone interview following the statement’s release. Jon Diat, an AIG spokesman, declined to comment.

Resolving Disputes

AIG Chief Executive Officer Robert Benmosche, who took over in 2009, has been resolving legal disputes as he seeks to rebuild the insurer. The company has faced suits from investors, rivals, counterparties and former executives tied to events before Benmosche’s arrival.

An interest-rate swap is an exchange between two parties of interest-rate exposures from floating to fixed rate or vice versa. Each thereby gains indirect access to the fixed or floating capital markets.

The case is Brookfield Asset Management Inc. v. AIG Financial Products Corp., 09-cv-08285, U.S. District Court, Southern District of New York (Manhattan).

With assistance from Katia Dmitrieva in Toronto. Editors: Dan Reichl, David Scheer