HARBINGER GROUP INC. – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Introduction

 This "Management's Discussion and Analysis of Financial Condition and Results of Operations" of Harbinger Group Inc. ("HGI," "we," "us," "our" and, collectively with its subsidiaries, the "Company") should be read in conjunction with our unaudited condensed consolidated financial statements included elsewhere in this report and "Management's Discussion and Analysis of Financial Condition and Results of Operations" of HGI which was included with our annual consolidated financial statements filed on Form 10-K with the Securities and Exchange Commission (the "SEC") on November 27, 2012 (the "Form 10-K"). Certain statements we make under this Item 2 constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. See "Forward-Looking Statements" in "Part II - Other Information" of this report. You should consider our forward-looking statements in light of our unaudited condensed consolidated financial statements, related notes, and other financial information appearing elsewhere in this report, the Form 10-K and our other filings with the SEC. In this Quarterly Report on Form 10-Q we refer to the three months ended June 30, 2013 as the "Fiscal 2013 Quarter", the nine months ended June 30, 2013 as the "Fiscal 2013 Nine Months", the three month ended July 1, 2012 as the "Fiscal 2012 Quarter" and the nine months ended July 1, 2012 as the "Fiscal 2012 Nine Months." HGI Overview We are a holding company and our principal operations are conducted through subsidiaries that offer life insurance and annuity products, financing and asset management, branded consumer products such as batteries, small appliances, pet supplies, home and garden control products, personal care products and hardware and home improvement products. We also hold oil and natural gas properties through an equity investment. Our outstanding common stock is 74.2% owned by Harbinger Capital Partners Master Fund I, Ltd. (the "Master Fund"), Global Opportunities Breakaway Ltd. and Harbinger Capital Partners Special Situations Fund, L.P. (together, the "Principal Stockholders"), not giving effect to the conversion rights of the Company's Series A Participating Convertible Preferred Stock or the Series A-2 Participating Convertible Preferred Stock (together, the "Preferred Stock"). We are focused on obtaining controlling equity stakes in companies that operate across a diversified set of industries and growing acquired businesses. We view the acquisition of Spectrum Brands Holdings, Inc. ("Spectrum Brands") and Fidelity & Guaranty Life Holdings, Inc. ("FGL," formerly Old Mutual U.S. Life Holdings, Inc.), in our 2011 fiscal year as our first steps in the implementation of that strategy. In addition to FGL's asset management activities, HGI has expanded its asset management business by forming Five Island Asset Management, LLC ("Five Island") and Salus Capital Partners, LLC ("Salus"), its subsidiary engaged in providing secured asset-based loans to entities across a variety of industries. Lastly, in February 2013 we finalized a joint venture with EXCO Resources, Inc. ("EXCO") to create a private oil and natural gas joint venture (the "EXCO/HGI JV"), through our wholly-owned subsidiary, HGI Energy Holdings, LLC ("HGI Energy"). In addition to our intention to acquire controlling interests, we may also from time to time make investments in debt instruments, acquire minority equity interests in companies and expand our operating businesses. We believe that our access to the public equity markets may give us a competitive advantage over privately-held entities with whom we compete to acquire certain target businesses on favorable terms. We may pay acquisition consideration in the form of cash, our debt or equity securities, or a combination thereof. In addition, as a part of our acquisition strategy we may consider raising additional capital through the issuance of equity or debt securities. We currently operate in four segments: Consumer Products through Spectrum Brands, Insurance through FGL, Energy through HGI Energy, and Financial Services (currently, primarily the operations of Salus). Consumer Products Segment Through Spectrum Brands, we are a diversified global branded consumer products company with positions in seven major product categories: consumer batteries; small appliances; home and garden control products; pet supplies; electric shaving and grooming products; electric personal care products; and hardware and home improvement products. Spectrum Brands' operating performance is influenced by a number of factors including: general economic conditions; foreign exchange fluctuations; trends in consumer markets; consumer confidence and preferences; overall product line mix, including pricing and gross margin, which vary by product line and geographic market; pricing of certain raw materials and commodities; energy and fuel prices; and general competitive positioning, especially as impacted by competitors' advertising and promotional activities and pricing strategies.                                         76

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  Insurance Segment Through FGL, we are a provider of annuity and life insurance products to the middle and upper-middle income markets in the United States. Based in Baltimore, Maryland, FGL operates in the United States through its subsidiaries Fidelity & Guaranty Life Insurance Company ("FGL Insurance") and Fidelity & Guaranty Life Insurance Company of New York ("FGL NY Insurance"). FGL's principal products are deferred annuities (including fixed indexed annuity ("FIA") contracts), immediate annuities, and life insurance products, which are sold through a network of approximately 200 independent marketing organizations ("IMOs"), representing approximately 19,000 independent agents. FGL's profitability depends in large part upon the amount of assets under management, the ability to manage operating expenses, the costs of acquiring new business (principally commissions to agents and bonuses credited to policyholders) and the investment spreads earned on contractholder fund balances. Managing net investment spreads involves the ability to manage investment portfolios to maximize returns and minimize risks such as interest rate changes and defaults or impairment of investments and the ability to manage interest rates credited to policyholders and costs of the options and futures purchased to fund the annual index credits on the FIAs. Energy Segment On February 14, 2013, EXCO and HGI formed the EXCO/HGI JV to own and operate conventional oil and natural gas properties. EXCO contributed to the EXCO/HGI JV its conventional assets in and above the Canyon Sand formation in the Permian Basin in West Texas as well as in the Holly, Waskom, Danville and Vernon fields in East Texas and North Louisiana.  The EXCO/HGI JV acquired the conventional oil and natural gas assets from EXCO for approximately $725.0 million of total consideration, representing HGI's effective equity interest of $372.5 million, $127.5 million in properties contributed by EXCO, in each case before giving effect to the closing adjustments related to the July 1, 2012 effective date, and approximately $225.0 million of indebtedness borrowed by the EXCO/HGI JV from a revolving credit agreement entered into by the EXCO/HGI JV ("EXCO/HGI JV Credit Agreement"). In exchange for the contribution of its assets, EXCO received cash consideration of $574.8 million, a 24.5% limited partner interest in the EXCO/HGI JV and a 50% interest in the general partner of the EXCO/HGI JV. HGI and its subsidiaries contributed $349.8 million cash, after customary closing adjustments, and received a 73.5% limited partner interest in the EXCO/HGI JV and a 50% interest in the general partner. After giving effect to the 2% general partner interest in the EXCO/HGI JV, EXCO and HGI own an economic interest in the Partnership of 25.5% and 74.5% respectively. The primary strategy of the EXCO/HGI JV is to continue the efficient production from, and development of, its existing asset base. Given the inherent decline in the production potential of its existing assets base, the EXCO/HGI JV also intends to pursue acquisitions of predominantly-producing long-life conventional oil and natural gas properties. Consistent with this strategy, on February 14, 2013, the EXCO/HGI JV entered into an agreement to acquire oil and natural gas assets in the Danville, Waskom and Holly fields in East Texas and North Louisiana from an affiliate of BG Group plc ("BG Group") for $132.5 million, subject to customary closing adjustments. These properties represent an incremental working interest in properties that EXCO contributed to the EXCO/HGI JV. This transaction was funded using funds drawn from the EXCO/HGI JV Credit Agreement. The EXCO/HGI JV believes that this strategy will allow it to generate and to opportunistically add incremental cash flows. The board of the EXCO/HGI JV declared a $5.0 million distribution in the Fiscal 2013 Quarter, of which $3.7 million was received by HGI Energy. Subsequent to the end of the quarter, the EXCO/HGI JV declared a further distribution of $10.0 million payable on August 15, 2013, of which our proportionate share will be $7.5 million. The EXCO/HGI JV plans to continue to make quarterly distributions of free cash flow available after capital expenditures and debt service. The EXCO/HGI JV plans to utilize derivative instruments to protect the cash flow potential of its assets and manage exposure to fluctuations in oil and natural gas prices. Financial Services Segment Our Financial Services segment includes the activities of our asset-based lender, Salus, and our newly formed asset manager, Five Island.  Through Salus, we are a provider of secured loans to the middle market across a variety of industries. Salus finances loan commitments that typically range from $5 to $50 million with the ability to lead and agent larger transactions. The Salus platform also serves as an asset manager to certain institutional investors such as community and regional                                         77

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  banks, insurance companies, family offices, private equity funds and hedge funds who may lack the infrastructure and dedicated competency within senior secured lending. As of June 30, 2013, Salus has funded loans totaling $271.1 million aggregate principal amount outstanding. The Salus loans are funded through capital commitments from HGI and funds committed by FGL as co-lender. Salus provides secured loans to the middle market. Salus predominantly makes loans based on asset-based finance, which is a financing tool where the decision to lend is primarily based on the value of the borrowers' collateral. Collateral is viewed as the primary source of repayment, while the borrowers' creditworthiness is viewed as secondary source of repayment. As a result, asset-based finance emphasizes the monitoring of the collateral that secures the asset-based loan. Salus focuses its credit analysis on the value of accounts receivable and inventory (or other assets) and estimates how much liquidity it can provide against those assets. Salus establishes a loan structure and collateral monitoring process that is continuous and focused on the collateral, significantly reducing the risk of loss inherent in delayed intervention. As of June 30, 2013, none of these loans were delinquent. Salus seeks to develop relationships with borrowers that may not qualify for traditional bank financing because of their size, historical performance, geography or complexity of their situation. Salus' loans are used across a range of industries for growth capital, general working capital or seasonal needs, acquisitions or opportunistic situations, trade finance, turnarounds, dividend recaps, refinancing and debtor-in-possession financing.                                          78

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  Highlights for the Fiscal Quarter and Nine Months Ended June 30, 2013 Significant Transactions and Activity During the fiscal quarter and nine months ended June 30, 2013, we made significant progress in our business strategy to reduce our cost of capital, increase our investor base, grow our existing business, and diversify the businesses in which we operate. The most significant of these steps include the following: HGI •   In December 2012, we issued $700.0 million aggregate principal amount 7.875% 

Senior Secured Notes due 2019 (the "7.875% Notes") and used part of the

proceeds of the offering to accept for purchase $498.0 million aggregate

principal amount of our 10.625% Senior Secured Notes due 2015 (the "10.625%

Notes") pursuant to a tender offer (the "Tender Offer") for the 10.625%

Notes. The remaining 10.625% Notes were redeemed by the trustee on January

23, 2013. The remainder of the proceeds of the issuance of the 7.875% Notes

was used for working capital by the Company and its subsidiaries and for

general corporate purposes, including the financing of future acquisitions

and businesses.

<p>• In December 2012, we closed a secondary offering, in which the Principal

Stockholders offered 20.0 million shares of common stock at a price to the

public of $7.50 per share, increasing our public float and broadening our

shareholder base. In addition, in January 2013, the underwriters exercised

their option to purchase an additional 3.0 million shares of common stock

from the Principal Stockholders. We did not receive any proceeds from the

sale of shares in this offering.

• In February 2013, we finalized a joint venture with EXCO to create the

EXCO/HGI JV. The EXCO/HGI JV purchased and will operate certain of EXCO's

producing U.S. conventional oil and natural gas assets in the Permian Basin,

East Texas and North Louisiana.

Consumer Products segment • In December 2012, Spectrum Brands acquired the residential hardware and home

improvement business (the "HHI Business") from Stanley Black & Decker, Inc.

("Stanley Black & Decker") (the "Hardware Acquisition"). The Hardware

Acquisition is expected to enhance Spectrum Brand's top-line growth, margins

and free cash flow profile, while providing added scale, greater product

diversity and attractive cross-selling opportunities.

• In December 2012, Spectrum Brands assumed from Spectrum Brands Escrow Corp.

$520.0 million aggregate principal amount of 6.375% Senior Notes due 2020

(the "6.375% Notes") and $570.0 million aggregate principal amount of 6.625%

Senior Notes due 2022 (the "6.625% Notes"), in connection with the Hardware

Acquisition. Spectrum Brands used the net proceeds from the offering to fund

a portion of the purchase price and related fees and expenses for the

Hardware Acquisition. Spectrum Brands financed the remaining portion of the

Hardware Acquisition with a new $800.0 million term loan facility, of which

$100.0 million is in Canadian dollar equivalents (the "Term Loan"). A portion

of the Term Loan proceeds were also used to refinance the former term loan

facility, maturing June 17, 2016, which had an aggregate amount outstanding

of $370.2 million prior to refinancing.

• On April 8, 2013, the Company completed the acquisition of certain assets of

Tong Lung Metal Industry Co. Ltd., a Taiwan Corporation ("TLM Taiwan"),

completing the Hardware Acquisition. TLM Taiwan is involved in the production

     of residential locksets.   

Insurance segment • In March 2013, FGL issued $300.0 million aggregate principal amount of their

6.375% senior notes, due April 1, 2021, at par value (the "FGL Notes".) FGL

used a portion of the net proceeds from the issuance to pay a special

dividend to HGI and expects to use the remainder for general corporate

purposes, to support the growth of its subsidiary life insurance company.

• In December 2012, FGL entered into a coinsurance agreement (the "Reinsurance

Agreement") with Front Street Re (Cayman) Ltd. ("Front Street Cayman"), also

an indirect subsidiary of the Company. Pursuant to the Reinsurance Agreement,

Front Street Cayman has reinsured approximately 10%, or approximately $1.5

    billion of FGL's policy liabilities, on a funds-withheld basis.                                           79

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Energy segment • Immediately following closing of the EXCO/HGI JV, the EXCO/HGI JV entered

into an agreement to purchase all of the shallow Cotton Valley assets from an

affiliate of BG Group, for $130.9 million, after customary closing

adjustments. The transaction closed on March 5, 2013 and was funded with

borrowings from the EXCO/HGI JV Credit Agreement. In connection with the

acquisition of the properties from BG Group, the EXCO/HGI JV received an

increase to the borrowing base to $470.0 million under the EXCO/HGI JV Credit

     Agreement.   

Financial Services segment • Salus originated $586.4 million of new asset-backed loan commitments in the

Fiscal 2013 Quarter and had $271.1 million of loans outstanding as of

June 30, 2013.

• Revenue generated from the operations of Salus and Five Island together

contributed approximately $10.2 million to our consolidated revenues for the

Fiscal 2013 Quarter, gross of revenue from affiliated entities. The Financial

Services segment had net income for the Fiscal 2013 Quarter of $2 million.

• In connection with the Reinsurance Agreement, Front Street Cayman, FGL and an

indirect subsidiary of the Company, Five Island, also entered into an

investment management agreement, pursuant to which Five Island will manage

the assets securing Front Street Cayman's reinsurance obligations under the

Reinsurance Agreement, which assets are held by FGL in a segregated account.

The assets in the segregated account will be invested in accordance with

FGL's existing guidelines.

Key financial highlights • Net income attributable to common and participating preferred stockholders

increased to $91.6 million, or $0.45 per common share attributable to

controlling interest ($0.25 diluted), compared to a net loss attributable to

common and participating preferred stockholders of $149.1 million, or $1.07

per common share attributable to controlling interest ($1.07 diluted), in the

Fiscal 2012 Quarter.

• Our Fiscal 2013 third quarter results include the following items:

? $20.4 million of realized investment gains in our Insurance segment; and

  ?         a $52.6 million gain from the change in the fair value of the equity           conversion feature of preferred stock which was the result of an 8.7%           decrease in our stock price from $8.26 to $7.54 per share during the           Fiscal 2013 Quarter; offset by,   ?         tax expense of $36.8 million resulting in an effective tax rate of           23.7% which was primarily driven by pretax losses in the United States

and some foreign jurisdictions for which the Company has established

full valuation allowances against the benefit, deferred income tax

expense due to changes in the tax bases of indefinite lived intangibles

that are amortized for tax purposes, but not for book purposes, and tax

expense on income in certain other foreign jurisdictions that will not

be creditable in the United States.

• We ended the quarter with corporate cash and investments of approximately

$122.0 million (primarily held at HGI and HGI Funding LLC). Subsequent to the

end of the quarter we issued $225.0 million aggregate principal amount of

additional 7.875% Notes (the "New Notes".)

• Our Consumer Product's operating profit for the Fiscal 2013 Quarter increased

$20.5 million, or 21.5%, to $115.7 million from $95.2 million for the Fiscal

2012 Quarter. Our Consumer Products segment's adjusted earnings before

interest, taxes, depreciation and amortization ("Adjusted EBITDA") increased

by $3.5 million, or 1.9%, to $188.5 million versus the Fiscal 2012 Quarter

primarily due to higher sales, synergy benefits and cost reduction

initiatives. Adjusted EBITDA margin represented 17.3% of sales as compared to

17.16% in the Fiscal 2012 Quarter. See Non-GAAP measures below for more

details.

• Our Insurance segment's operating profit for the Fiscal 2013 Quarter

increased $80.0 million, to $78.5 million from an operating loss of $1.5

million for the Fiscal 2012 Quarter. Our Insurance segment's adjusted

operating income ("Insurance AOI") increased by $20.3 million, or 597.1%, to

$23.7 million versus the Fiscal 2012 Quarter, primarily as a result of the

non-recurrence of an $11.0 million charge for an estimated unreported death

    claims liability, net of reinsurance, recorded during the Fiscal 2012     Quarter. See Non-GAAP measures below for more details.                                           80

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• Through the nine months ended June 30, 2013, we received dividends of

approximately $108.7 million from our respective subsidiaries, including

$93.0 million, $15.0 million and $0.7 million from FGL, Spectrum Brands and

Salus, respectively. The FGL dividend of $93.0 million includes the special

dividend of $73.0 million paid out of the proceeds from the $300.0 million

    aggregate principal amount of the FGL Notes.                                             81

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  Results of Operations Fiscal Quarter and Fiscal Nine Months Ended June 30, 2013 Compared to Fiscal Quarter and Fiscal Nine Months Ended July 1, 2012 Presented below is a table that summarizes our results of operations and compares the amount of the change between the fiscal periods (in millions):                                          Fiscal Quarter                               Fiscal Nine Months                                                          Increase /                                     Increase /                              2013          2012          (Decrease)         2013          2012          (Decrease) Revenues: Consumer Products         $ 1,089.8$   824.8$      265.0$ 2,947.8$ 2,419.9$      527.9 Insurance                     276.0         186.3             89.7         1,022.3         862.6            159.7 Energy                         37.8             -             37.8            54.5             -             54.5 Financial Services             10.2           1.7              8.5            29.5           2.1             27.4 Intersegment elimination       (3.2 )        (0.6 )           (2.6 )          (9.3 )        (0.7 )           (8.6 ) Consolidated revenues     $ 1,410.6$ 1,012.2$      398.4$ 4,044.8$ 3,283.9$      760.9  Operating income (loss): Consumer Products         $   115.7$    95.2$       20.5$   236.1$   234.2$        1.9 Insurance                      78.5          (1.5 )           80.0           351.5          89.5            262.0 Energy                          4.8             -              4.8             5.3             -              5.3 Financial Services              4.1           0.5              3.6            16.6          (0.5 )           17.1 Intersegment elimination       (3.0 )        (0.6 )           (2.4 )          (9.3 )        (0.7 )           (8.6 ) Total segments                200.1          93.6            106.5           600.2         322.5            277.7 Corporate expenses            (17.5 )       (12.1 )           (5.4 )         (68.2 )       (33.3 )          (34.9 ) Consolidated operating income                        182.6          81.5            101.1           532.0         289.2            242.8 Interest expense              (83.9 )       (54.4 )          (29.5 )        (302.7 )      (194.4 )         (108.3 ) Gain (loss) from the change in the fair value of the equity conversion feature of preferred stock                          52.6        (125.5 )          178.1            81.9        (124.0 )          205.9 Gain on contingent purchase price reduction          -             -                -               -          41.0            (41.0 ) Other income (expense), net                             4.2         (17.5 )           21.7            (7.7 )       (26.0 )           18.3 Consolidated income (loss) from continuing operations before income taxes                         155.5        (115.9 )          271.4           303.5         (14.2 )          317.7 Income tax expense (benefit)                      36.8          (5.8 )           42.6           167.2          50.6            116.6 Net income (loss)             118.7        (110.1 )          228.8           136.3         (64.8 )          201.1 Less: Net income (loss) attributable to noncontrolling interest        15.1          25.0             (9.9 )          (8.1 )        18.8            (26.9 ) Net income (loss) attributable to controlling interest          103.6        (135.1 )          238.7           144.4         (83.6 )          228.0 Less: Preferred stock dividends and accretion        12.0          14.0             (2.0 )          36.3          45.6             (9.3 ) Net income (loss) attributable to common and participating preferred stockholders    $    91.6$  (149.1 )$      240.7$   108.1$  (129.2 )$      237.3    Revenues. Revenues for the Fiscal 2013 Quarter increased $398.4 million, or 39.4%, to $1,410.6 million from $1,012.2 million for the Fiscal 2012 Quarter. The increase was primarily driven by the Hardware Acquisition in our Consumer Products Segment, and to a lesser extent, realized and unrealized gains on derivative instruments based upon bond and equity market indices used to hedge against promised returns on our Insurance segment's FIA products included within Benefits and changes in other changes policy reserve expense, contributions from the newly formed EXCO/HGI JV, and new business activity in our Financial Services segment.  Revenues for the Fiscal 2013 Nine Months increased $760.9 million, or 23.2%, to $4,044.8 million from $3,283.9 million for the Fiscal 2012 Nine Months. The increase was primarily driven by the Hardware Acquisition in our Consumer Products segment, realized gains on the sales of fixed maturity securities in our Insurance segment to                                         82

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  utilize certain tax benefits and a change in investment strategy to shorten the duration of the portfolio, the EXCO/HGI JV formed in the Fiscal 2013 Nine Months, and new business activity in our Energy and Financial Services segments. Operating Profit. Operating profit for the Fiscal 2013 Quarter increased $101.1 million, or 124.0%, to $182.6 million from $81.5 million for the Fiscal 2012 Quarter. The increase was primarily the result of favorable investment gains in our Insurance Segment, the Hardware Acquisition in our Consumer Products segment, and new business activity in our Energy and Financial Services segments. The increase was offset in part by increased salary and overhead costs in our Corporate segment to support growth in the business. Operating profit for the Fiscal 2013 Nine Months increased $242.8 million, or 84.0%, to $532.0 million from $289.2 million for the Fiscal 2012 Nine Months. The increase was primarily the result of revenue increases described above, favorable investment gains, positive immediate annuity mortality, positive FIA derivative fair value movements in our Insurance segment and new business activity in our Energy and Financial Services segment. The increase was offset in part by increased bonus and headcount in our Corporate segment to support growth in the business. Interest Expense. Interest expense increased $29.5 million to $83.9 million for the Fiscal 2013 Quarter from $54.4 million for the Fiscal 2012 Quarter. The increase is attributable to the higher levels of indebtedness as compared to the prior fiscal quarter. Interest expense increased $108.3 million to $302.7 million for the Fiscal 2013 Nine Months from $194.4 million for the Fiscal 2012 Nine Months. The increase is principally due to $58.9 million of fees incurred by HGI related to the issuance of the 7.875% Notes, the extinguishment of the 10.625% Notes, and $29.0 million of costs incurred by Spectrum Brands associated with the financing of the Hardware Acquisition. The fees incurred by HGI consisted of $45.9 million cash charges for fees and expenses, and $13.0 of non-cash charges for the write down of debt issuance costs and net unamortized discount related to the extinguishment of the 10.625% Notes. The $29.0 million of costs incurred by Spectrum Brands relating to the Hardware Acquisition financing included: (i) $13.0 million of cash costs related to unused bridge financing commitments; (ii) $6.0 million of cash costs related to interest on the 6.375% Notes and the 6.625% Notes incurred while in escrow prior to the closing of the acquisition; (iii) $2.0 million of cash costs related to a ticking fee on the term loan facility incurred prior to the closing of the transaction; (iv) $3.0 million related to cash costs for underwriting, legal, accounting and other fees; and (v) $5.0 million of non-cash costs for the write off of unamortized deferred financing fees and original issue discount on the former term loan facility that was refinanced in connection with the acquisition. The remainder of the increase is directly attributable to the higher levels of indebtedness as compared to the prior year. Gain (loss) from the change in the fair value of the equity conversion feature of preferred stock. The gain from the change in the fair value of the equity conversion feature of the preferred stock of $52.6 million for the Fiscal 2013 Quarter was principally due to a decrease in the market price of our common stock from $8.26 to $7.54 per share during the Fiscal 2013 Quarter. During the Fiscal 2012 Quarter the loss from the change in the fair value of the equity conversion feature of the preferred stock of $125.5 million was due to an increase in the market price of our common stock from $5.18 to $7.79 per share during the Fiscal 2012 Quarter. The gain from the change in the fair value of the equity conversion feature of the preferred stock of $81.9 million for the Fiscal 2013 Nine Months was principally due to a decrease in the market price of our common stock from $8.43 to $7.54 per share during the Fiscal 2013 Nine Months. During the Fiscal 2012 Nine Months the loss from the change in the fair value of the equity conversion feature of the preferred stock of $124.0 million due to an increase in the market price of our common stock from $5.07 to $7.79 per share during the Fiscal 2012 Nine Months. Gain on contingent purchase price reduction. A gain of $41.0 million was recognized in the Fiscal 2012 Nine Months which reflects the estimated fair value of a contingent purchase price reduction receivable (see Note 3, Acquisitions, to our Condensed Consolidated Financial Statements.) Other income (expense), net. Other income (expense), net decreased $21.7 million to $4.2 million for the Fiscal 2013 Quarter from $17.5 million for the Fiscal 2012 Quarter. The decrease was due to a decrease in unrealized losses on trading securities held principally for investing purposes at HGI, and realized and unrealized gains on oil and gas derivatives held by the EXCO/HGI JV.                                         83

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  Other income (expense), net decreased $18.3 million to $7.7 million for the Fiscal 2013 Nine Months from $26.0 million for the Fiscal 2012 Nine Months. The decrease resulted from decreased losses on trading securities held principally for investing purposes at HGI, and as a result of realized and unrealized gains on oil and natural gas derivatives noted above. Income Taxes. For the Fiscal 2013 Quarter and Fiscal 2013 Nine Months ended June 30, 2013, our effective tax rates of 23.7% and 55.1% were negatively impacted by pretax losses in the United States and some foreign jurisdictions for which we concluded that the tax benefits are not more-likely-than-not realizable, deferred income tax expense due to changes in the tax bases of indefinite lived intangibles that are amortized for tax purposes, but not for book purposes, and tax expense on income in certain other foreign jurisdictions that will not be creditable in the United States. Partially offsetting these factors in the Fiscal 2013 Nine Months was the release of U.S. valuation allowances of $49.3 million on deferred tax assets that Spectrum Brands has determined are more-likely-than-not realizable as a result of a recent acquisition and $82.0 million of income resulting from a decrease in the fair value of the equity conversion feature of preferred stock, for which is not taxable. Net operating loss ("NOL") and tax credit carryforwards of HGI and Spectrum Brands are subject to full valuation allowances and those of FGL are subject to partial valuation allowances, as we concluded all or a portion of the associated tax benefits are not more-likely-than-not realizable. Utilization of NOL and other tax credit carryforwards of HGI, Spectrum Brands and FGL are subject to limitations under Internal Revenue Code ("IRC") Sections 382 and 383. Such limitations result from ownership changes of more than 50 percentage points over a three-year period. For the Fiscal 2012 Quarter our effective tax rate of 5.0% was lower than the United States Federal statutory rate of 35% and, for the Fiscal 2012 Nine Months ended July 1, 2012, we recorded tax expense at the rate of (356.3)% despite incurring a pretax loss, primarily as a result of: (i) $125.5 million of expense recorded in the Fiscal 2012 Quarter resulting from an increase in fair value of the equity conversion feature of preferred stock, for which no tax benefit is available; (ii) pretax losses in the United States and some foreign jurisdictions for which we concluded that the tax benefits are not more-likely-than-not realizable; (iii) deferred income tax expense due to changes in the tax bases of indefinite lived intangibles that are amortized for tax purposes, but not for book purposes; and (iv) tax expense on income in certain other foreign jurisdictions that will not be creditable in the United States. Partially offsetting these factors in the Fiscal 2012 Nine Months was: (i) a $19.0 million release by FGL of valuation allowances on deferred tax assets primarily as a result of revised projections in connection with the regulatory non-approval of a proposed reinsurance transaction; (ii) a $41.0 million gain on a contingent purchase price reduction receivable for which is not taxable; and (iii) a $13.9 million release by Spectrum Brands of valuation allowances on deferred tax assets as a result of an acquisition. Spectrum Brands' management decided to not permanently reinvest the Fiscal 2012 and future foreign subsidiary earnings, except to the extent repatriation of such earnings is limited or precluded by law. Using these funds, Spectrum Brands' management plans to voluntarily prepay its U.S. debt, repurchase shares and fund U.S. acquisitions and ongoing U.S. operational cash flow requirements. As a result of the valuation allowance recorded against Spectrum Brands' U.S. net deferred tax assets, including net operating loss carryforwards, Spectrum Brands does not expect to incur incremental U.S. tax expense on the expected future repatriation of foreign earnings. If the U.S. valuation allowance were released at some future date, the U.S. tax on foreign earnings repatriation could have a material impact on our effective tax rate in future periods. For Fiscal 2013, we expect to accrue less than $4.0 million of additional tax expense from non-U.S. withholding and other taxes expected to be incurred on repatriation of current earnings. Noncontrolling Interest. The net income (loss) attributable to noncontrolling interest reflects the share of the net income (loss) of Spectrum Brands and Salus attributable to the noncontrolling interest not owned by HGI. Such amount varies in relation to Spectrum Brands' and Salus' net income or loss for the period and the percentage interest not owned by HGI, which was 40.8% and 42.6% for Spectrum Brands, and 7.7% and 0.0% for Salus, respectively, as of June 30, 2013 and July 1, 2012. Preferred Stock Dividends and Accretion. The Preferred Stock dividends and accretion consist of (i) a cumulative quarterly cash dividend at an annualized rate of 8%, (ii) a quarterly non-cash principal accretion at an annualized rate of 4% through March 31, 2012, that was reduced to 2% for the remainder of Fiscal 2012, and which was further reduced to a zero rate of accretion on September 30, 2012 for the first half of Fiscal 2013, since we achieved a specified rate of growth measured by the increase in the value of HGI's net assets (the "Preferred Stock NAV") calculated in accordance with the certificates of designation of the Preferred Stock, and (iii) accretion of the carrying value of our Preferred Stock, which was discounted by the bifurcated equity conversion feature and issuance costs.                                         84

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  The decrease in the Preferred Stock dividends and accretion for the Fiscal 2013 Quarter compared to the Fiscal 2013 Quarter is due to the quarterly non-cash principal accretion rate decreasing from 4% in the Fiscal 2012 Quarter to a zero rate of accretion for the Fiscal 2013 Quarter. For purposes of determining the Preferred Stock accretion amount, we calculate the Preferred Stock NAV in accordance with terms of the certificates of designation of the Preferred Stock. In accordance with the certificates of designation, we are required to calculate the Preferred Stock NAV on September 30 and March 31 of each calendar year. The accretion rate will be set for the following six months based on the performance of our Preferred Stock NAV as of the date of such calculation. The Preferred Stock NAV as of March 31, 2013, calculated in accordance with the certificates of designation, was approximately $2.0 billion. This calculation results in no quarterly non-cash accretion for the remainder of Fiscal 2013, although it could increase to an annualized rate of 2% or 4% in subsequent periods based upon changes in the Preferred Stock NAV.  

Consumer Products Segment Presented below is a table that summarizes the results of operations of our Consumer Products segment and compares the amount of the change between the fiscal periods (in millions):

                                         Fiscal Quarter                               Fiscal Nine Months                                                         Increase /                                     Increase /                              2013          2012         (Decrease)         2013          2012          (Decrease)  Net consumer product sales                     $ 1,089.8$  824.8$        265.0$ 2,947.8$ 2,419.9$        527.9 Consumer products cost of goods sold                    707.0        533.1              173.9       1,954.0       1,584.1              369.9 Consumer products gross margin                        382.8        291.7               91.1         993.8         835.8              158.0 Selling, acquisition, operating and general expenses                      246.8        180.4               66.4         700.2         555.1              145.1 Amortization of intangibles                    20.3         16.1                4.2          57.5          46.5               11.0 Operating income (loss) - Consumer Products segment $   115.7$   95.2     $         20.5     $   236.1$   234.2     $          1.9   Revenues. Net consumer products sales for the Fiscal 2013 Quarter increased $265.0 million, or 32.1%, to $1,089.8 million from $824.8 million</money> for the Fiscal 2012 Quarter. The increase was primarily due to sales from the Hardware Acquisition. The increase was offset in part by a decline in household insect control sales in the home and garden product line due to the late arrival of warm weather that resulted in a delay to the major selling season for these products; planned exit from marginally profitable products in small appliances, largely in North America; and lower consumer battery sales resulting from the non-recurrence of promotions and inventory management. Net consumer products sales for the Fiscal 2013 Nine Months increased $527.9 million, or 21.8%, to $2,947.8 million from $2,419.9 million for the Fiscal 2012 Nine Months. The increase was primarily due to sales from the Hardware Acquisition. In addition, and to a lesser extent, sales benefited from an increase in pet supplies as a result of increased litter pan sales in North America and the full period impact of the FURminator acquisition completed in December of 2011. The increases were offset in part by the planned exit of marginally profitable small appliances products, lower electric shaving and grooming products as a result of labor disruptions at U.S. ports of entry during the peak holiday period and the negative impact of foreign currency in consumer batteries which offset a marginal sales increase.                                         85

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  Consolidated net sales by product line for each of those respective periods are as follows (in millions):                                          Fiscal Quarter                               Fiscal Nine Months                                                           Increase                                       Increase Product line net sales        2013          2012         (Decrease)         2013          2012          (Decrease) Consumer batteries         $   207.4$  211.2$       (3.8 )$   678.1$   684.3$       (6.2 ) Small appliances               168.7        173.1             (4.4 )         543.4         575.6            (32.2 ) Pet supplies                   156.4        157.6             (1.2 )         456.6         449.0              7.6 Electric shaving and grooming products               61.8         62.9             (1.1 )         208.0         215.0             (7.0 ) Electric personal care products                        53.7         53.5              0.2           196.7         195.1              1.6 Home and garden control products                       156.6        166.5             (9.9 )         289.1         300.9            (11.8 ) Hardware and home improvement products           285.2            -            285.2           575.9             -            575.9 Total net sales to external customers         $ 1,089.8$  824.8$      265.0$ 2,947.8$ 2,419.9$      527.9    Consumer products cost of goods sold/Gross Profit. Gross profit, representing net consumer products sales minus consumer products cost of goods sold, for the Fiscal 2013 Quarter was $382.8 million compared to $291.7 million for the Fiscal 2012 Quarter. The HHI Business contributed $101.4 million in gross profit. Spectrum Brands' gross profit margin, representing gross profit as a percentage of consumer products net sales, for the Fiscal 2013 Quarter decreased to 35.1% from 35.4% in the Fiscal 2012 Quarter. The decrease in gross profit margin was driven by unfavorable product mix and increased product costs. Gross profit, representing net consumer products sales minus consumer products cost of goods sold, for the Fiscal 2013 Nine Months was $993.8 million compared to $835.8 million for the Fiscal 2012 Nine Months. The HHI Business contributed $169.0 million in gross profit. Gross profit margin for the Fiscal 2013 Nine Months decreased to 33.7% from 34.5% in the Fiscal 2012 Nine Months. The decrease in gross profit and gross profit margin was driven by a $31.0 million increase to cost of goods sold due to the sale of inventory which was revalued in connection with the acquisition of the HHI Business, which more than offset improvements to gross profit resulting from the exit of low margin products in Spectrum Brands' small appliances category. Selling, acquisition, operating and general expenses. Selling, acquisition, operating and general expenses increased by $66.4 million, or 36.8%, to $246.8 million for the Fiscal 2013 Quarter, from $180.4 million for the Fiscal 2012 Quarter. The $66.4 million increase in Spectrum Brands' selling, operating and general expenses is primarily attributable to the acquisition of the HHI Business which accounts for the $55.3 million increase in operating expenses and led to a $2.5 million increase in acquisition and integration related charges. In addition, Spectrum Brands incurred a $10.0 million increase in restructuring and related charges primarily attributable to the global expense rationalization initiative announced in the Fiscal 2013 Quarter and an increase in stock compensation expense of $13.0 million, tempered by $14.0 million in savings from cost reduction initiatives and positive foreign exchange impacts of $1.0 million. Selling, acquisition, operating and general expenses increased by $145.1 million, or 26.1%, to $700.2 million for the Fiscal 2013 Nine Months, from $555.1 million for the Fiscal 2012 Nine Months. The $145.1 million increase in Spectrum Brands' selling, operating and general expenses is principally due to the acquisition of the HHI Business which accounted for $116.4 million in operating expenses and led to a $19.9 million increase in acquisition and integration related charges. In addition, Spectrum Brands incurred a $16.0 million increase in restructuring and related charges, and an increase in stock compensation expense of $17.0 million tempered by $17.0 million in savings from cost reduction initiatives and positive foreign exchange impacts of $4.0 million. Amortization of intangibles. For the Fiscal 2013 Quarter, amortization of intangibles increased $4.2 million, or 26.1%, to $20.3 million from $16.1 million for the Fiscal 2012 Quarter. For the Fiscal 2013 Nine Months, amortization of intangibles increased $11 million, or 23.7%, to $57.5 million from $46.5 million for the Fiscal 2012 Nine Months. The increases in the three and nine months ended June 30, 2013 was primarily due to an increase in amortization of intangibles acquired as part of the HHI Business Acquisition. Spectrum Brands expects an increase in amortization of intangibles in future periods due to additional amortizable definite-lived intangibles acquired as part of business acquisitions within our Consumer Products segment (see Note 3, Acquisitions, in the accompanying Condensed Consolidated Financial Statements for further detail.)                                          86

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Insurance Segment Presented below is a table that summarizes the results of operations of our Insurance Segment and compares the amount of the change between the fiscal periods (in millions):

                                         Fiscal Quarter                              Fiscal Nine Months                                                        Increase /                                     Increase /                              2013         2012         (Decrease)          2013          2012         (Decrease)  Insurance premiums        $   19.0$   12.1$        6.9$    46.9$   42.2$        4.7 Net investment income        182.6        178.1              4.5            519.5        537.6            (18.1 ) Net investment gains (losses)                      58.3        (12.9 )           71.2            411.5        254.6            156.9 Insurance and investment product fees and other        16.1          9.0              7.1             44.4         28.2             16.2 Total Insurance segment revenues                     276.0        186.3             89.7          1,022.3        862.6            159.7 Benefits and other changes in policy reserves                     107.2        141.0            (33.8 )          431.7        559.7           (128.0 ) Acquisition, operating and general expenses, net of deferrals                  25.6         19.9              5.7             76.0        101.4            (25.4 ) Amortization of intangibles                   64.7         26.9             37.8            163.1        112.0             51.1 Total Insurance segment operating costs and expenses                     197.5        187.8              9.7            670.8        773.1           (102.3 )  Operating income - Insurance segment         $   78.5$   (1.5 )$       80.0$   351.5$   89.5$      262.0    Insurance premiums. Premiums primarily reflect insurance premiums for traditional life insurance products which are recognized as revenue when due from the policyholder. FGL Insurance has ceded the majority of its traditional life business to unaffiliated third party reinsurers. The remaining traditional life business is primarily related to traditional life contracts that contain return of premium riders, which have not been reinsured to third party reinsurers. For the Fiscal 2013 Quarter, premiums increased $6.9 million, or 57.0%, to $19.0 million from $12.1 million for the Fiscal 2012 Quarter. For the Fiscal 2013 Nine Months, premiums increased $4.7 million or 11.1%, to $46.9 million from $42.2 million for the Fiscal 2012 Nine Months. The increases for the Fiscal 2013 Quarter and Fiscal 2013 Nine Months are primarily due to the rescission of the coinsurance agreement with Wilton Re covering home certain disability income riders during the quarter which resulted in a decrease in ceded premiums of approximately $4.5 million. Net investment income. For the Fiscal 2013 Quarter and Nine Months, we had net investment income of $182.6 million and $519.5 million, respectively, compared to $178.1 million and $537.6 million for the Fiscal 2012 Quarter and Nine Months, respectively. For the Fiscal 2013 Quarter, net investment income increased $4.5 million, as compared to Fiscal 2012 Quarter, primarily due to FGL's strategy to reinvest excess cash and cash equivalents and lower yielding treasury notes into higher yielding assets. For the Fiscal 2013 Nine Months, net investment income decreased $18.1 million, as compared to Fiscal 2012 Nine Months, due to lower average yield on invested assets for the first six months of Fiscal 2013 resulting from portfolio changes to shorten the overall portfolio duration during the 2012 calendar year by selling longer dated and higher yielding investment grade rated bonds at gains in anticipation of rising interest rates and to realize certain tax-advantaged built-in-gains during the quarter ended December 30, 2012. Average invested assets (on an amortized cost basis) were $16.9 billion and $16.6 billion and the average yield earned on average invested assets was 4.34% and 4.50% (annualized) for the Fiscal 2013 Quarter and Fiscal 2012 Quarter, respectively, compared to interest credited and option costs of 3.04% and 3.22% (annualized) for each Fiscal Quarter, respectively. The average yield earned on average invested assets was 4.27% and 4.54% (annualized) for the Fiscal 2013 Nine Months and Fiscal 2012 Nine Months, respectively, compared to interest credited and option costs of 3.06% and 3.26% (annualized,) for each Fiscal Nine Months, respectively.  

FGL's net investment spread is summarized as follows (annualized):

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  Table of Contents                                            Fiscal Quarter       Fiscal Nine Months                                           2013       2012       2013         2012

Average yield on invested assets 4.34 % 4.50 % 4.27 %

   4.54 % Less: Interest credited and option cost   3.04 %    3.22 %      3.06 %        3.26 % Net investment spread                     1.30 %    1.28 %      1.21 %        1.28 %    The increase in net investment spread for the Fiscal 2013 Quarter is primarily attributable to an increase in net investment income due to FGL's strategy to reinvest excess cash and cash equivalents and lower yielding treasury notes into higher yielding assets during the Fiscal 2013 Quarter. Also contributing to the increase in spread was lower interest credited/option costs that resulted from lower crediting rates and a reduction in the cost of equity options hedging the FIA index credits.  

The decrease in net investment spread for the Fiscal 2013 Nine Months is primarily attributable to the decrease in net investment income during the period as discussed above partially offset by lower interest credited/option costs that resulted in lower crediting rates and a reduction in the cost of equity options hedging the FIA index credits.

  Net investment gains (losses). For the Fiscal 2013 Quarter, FGL had net investment gains of $58.3 million compared to net investment losses of $12.9 million for the Fiscal 2012 Quarter. The quarter over quarter increase of $71.2 million is due to $20.0 million of net realized and unrealized gains on long futures and equity options purchased to hedge the annual index credits for FIA contracts recognized during the Fiscal 2013 Quarter, compared to net realized and unrealized losses of $51.2 million during the Fiscal 2012 Quarter, an increase of $71.2 million. Net realized and unrealized gains on derivative instruments primarily resulted from the performance of the indices upon which the call options and futures contracts are based and the aggregate cost of options purchased. A substantial portion of the call options and futures contracts are based upon the Standard & Poors ("S&P") 500 Index with the remainder based upon other equity and bond market indices. Beginning in August of 2012, FGL modified its hedging strategy to be more statically hedged, thereby increasing the aggregate amount of options purchases in subsequent periods. Accordingly, the quarter over quarter increase was driven by the aggregate amount of options purchased due to sales of the Prosperity Elite product line which was introduced during the fourth quarter of Fiscal Year 2011, as well as the improved performance of the S&P 500.  For the Fiscal 2013 Nine Months, FGL had net investment gains of $411.5 million compared to net investment gains of $254.6 million for the Fiscal 2012 Nine Months. The period over period increase of $156.9 million is primarily due to $285.0 million of net investment gains on fixed maturity and equity available-for-sale securities in the Fiscal 2013 Nine Months, compared to net investment gains of $173.0 million for the Fiscal 2012 Nine Months. The $112.0 million increase period over period is primarily due to the tax strategy for realization of certain tax-advantaged built-in-gains related to the 2011 acquisition, by selling longer dated investment grade rated bonds at gains. Included in the Fiscal 2012 Nine Months was $30.5 million of gains associated with the asset transfer on October 1, 2011 for the closing of the final transaction-related reinsurance transaction with Wilton Re. The $30.5 million of gains were paid to Wilton Re as part of the initial asset transfer. The remaining increase was due to an increase in net realized and unrealized gains on long futures and equity options of $44.0 million due to the quarter over quarter factors discussed above.  

The components of the realized and unrealized gains on derivative instruments are as follows (in millions):

                                               Fiscal Quarter          Fiscal Nine Months                                               2013       2012           2013           2012 Call options: Gain (loss) on option expiration            $ 47.5$ (19.5 )$     87.4$ (57.3 ) Change in unrealized (loss) gain             (31.0 )     (25.1 )         26.6          106.0 Futures contracts: Gain (loss) on futures contracts expiration    6.7        (6.8 )         11.9           25.3 Change in unrealized (loss) gain              (3.2 )       0.2            0.7            8.6                                             $ 20.0$ (51.2 )$    126.6$  82.6

The average index credits to policyholders were as follows:

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  Table of Contents                                    Fiscal Quarter       Fiscal Nine Months                                   2013      2012        2013         2012 S&P 500 Index: Point-to-point strategy           4.71 %    2.59 %      5.36 %        2.34 % Monthly average strategy          4.10 %    0.18 %      4.90 %        1.48 % Monthly point-to-point strategy   5.67 %    0.01 %      4.26 %        0.02 % 3 Year high water mark           20.31 %   17.09 %     23.67 %       17.41 %    For the Fiscal 2013 Quarter and Fiscal 2013 Nine Months, the average return to contractholders from index credits during the period was 5.10% and 5.01% (annualized), compared to 1.24% and 1.45% (annualized) for the Fiscal 2012 Quarter. The period over period increases were primarily due to greater appreciation in the S&P 500 Index. Actual amounts credited to contractholder fund balances may be less than the index appreciation due to contractual features in the FIA contracts (caps, spreads, participation rates and asset fees) which allow FGL to manage the cost of the options purchased to fund the annual index credits. Insurance and investment product fees and other. For the Fiscal 2013 Quarter, insurance and investment product fees and other consists primarily of cost of insurance and surrender charges assessed against policy withdrawals in excess of the policyholder's allowable penalty-free amounts (up to 10% of the prior year's value, subject to certain limitations). These revenues increased $7.1 million, or 78.9%, to $16.1 million for the Fiscal 2013 Quarter from $9.0 million for the Fiscal 2012 Quarter and increased $16.2 million, or 57.4% to $44.4 million, for the Fiscal 2013 Nine Months from $28.2 million for the Fiscal 2012 Nine Months. These increases are primarily due to cost of insurance revenue on new universal life policies issued during the last twelve months and policy rider fees on the Prosperity Elite product line which was introduced during the fourth quarter of the year ended September 30, 2011. Benefits and other changes in policy reserves.  For the Fiscal 2013 Quarter, benefits and other changes in policy reserves decreased $33.8 million, or 24.0%, to $107.2 million, from $141.0 million for the Fiscal 2012 Quarter principally due to a $68.4 million decrease in the present value of future credits and guarantee liability compared to a $34.6 million increase in the Fiscal 2012 Quarter. The quarter over quarter decrease of $103.0 million was primarily driven by the increase in the risk free rates during the Fiscal 2013 Quarter compared to the decrease in rates during the Fiscal 2012 Quarter. Partially offsetting these decreases were index credits, interest credits and bonuses of $161.5 million during the Fiscal 2013 Quarter compared to $89.2 million during the Fiscal 2012 Quarter. The increase in interest credits quarter over quarter is primarily due to first time credits on annual point to point policies on the new Prosperity Elite product line which had large sales in the Fiscal 2012 Quarter. Changes in index credits are attributable to changes in the underlying indices and the amount of funds allocated by policyholders to the respective index options. For the Fiscal 2013 Nine Months, benefits and other changes in policy reserves decreased $128.0 million, or 22.9%, to $431.7 million, from $559.7 million for the Fiscal 2012 Nine Months principally due to the present value of future credits and guarantee liability which decreased $131.7 million during Fiscal 2013 Nine Months compared to a $6.1 million increase during the Fiscal 2012 Nine Months. The period over period decrease of $137.8 million was primarily driven by the increase in the risk free rates during the Fiscal 2013 Nine Months compared to the decrease in rates during the Fiscal 2012 Nine Months.  Selling, acquisition, operating and general expenses. Selling, acquisition, operating and general expenses, net of deferrals, of the Insurance segment, increased $5.7 million, or 28.6%, to $25.6 million for the Fiscal 2013 Quarter, from $19.9 million for the Fiscal 2012 Quarter principally due to compensation expense related to FGL's 2011 and 2012 stock option grants. The outstanding grants are marked to market each quarter based on the most recent valuation which resulted in additional stock compensation expense of $2.0 million in the Fiscal 2013 Quarter.  Selling, acquisition, operating and general expenses, net of deferrals, of the Insurance segment, decreased $25.4 million, or 25.0%, to $76.0 million for the Fiscal 2013 Nine Months, from $101.4 million for the Fiscal 2012 Nine Months principally due a $31.1 million ceding commission paid to Wilton Re primarily related to $30.5 million of investment gains realized on the securities transferred to Wilton Re on the October 17, 2011 effective date of the second acquisition-related reinsurance amendment.                                         89

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  Amortization of intangibles. For the Fiscal 2013 Quarter, amortization of intangibles increased $37.8 million, or 140.5%, to $64.7 million from $26.9 million for the Fiscal 2012 Quarter. This increase is primarily due to new deferrals of $345.2 million since the Acquisition Date. For the Fiscal 2013 Nine Months, amortization of intangibles increased $51.1 million, or 45.6%, to $163.1 million from $112.0 million for the Fiscal 2012 Nine Months primarily due an increase in amortization of acquisition costs as a result of higher earnings on the FIA line of business as well as new new deferrals. The increase in FIA earnings was principally due to sales of longer dated investment grade rated bonds at gains as discussed above.  

Energy Segment

                                         Fiscal Quarter                                Fiscal Nine Months                                                         Increase /                                        Increase /                              2013         2012          (Decrease)           2013           2012          (Decrease) Oil and natural gas revenues                  $   37.8     $       -     $         37.8     $    54.5        $       -     $         54.5 Oil and natural gas direct operating costs        18.1             -               18.1          26.9                -               26.9 Oil and natural gas operating margin              19.7             -               19.7          27.6                -               27.6 Acquisition, operating and general expenses, net of deferrals                  14.9             -               14.9          22.3                -               22.3 Operating income - Energy segment                   $    4.8     $       -     $          4.8     $   

5.3 $ - $ 5.3

   Oil and natural gas production, revenues, and prices For the Fiscal 2013 Quarter, the Energy segment's production was 119 MBbl of oil, 126 MBbl of natural gas liquids and 5,953 Mmcf of natural gas. Oil and natural gas revenues were $37.8 million. The Energy segment's average sales price, excluding the impact of derivative financial instruments, was $90.8 per Bbl of oil, $34.0 per Bbl of natural gas liquids, and $3.8 per Mcf of natural gas. The Energy segment's developmental activities in the Permian basin during the period included seven wells spud and nine wells completed. The production during the period consisted of 5.8 Bcfe from the East Texas/North Louisiana region and 1.6 Bcfe from the Permian basin. The production of the EXCO/HGI JV includes 1.4 Bcfe as a result of the acquisition of the Cotton Valley assets from the BG Group on March 5, 2013. For the period from inception to June 30, 2013, the Energy segment's production was 177 MBbl of oil, 180 MBbl of natural gas liquids and 8,726 Mmcf of natural gas. Oil and natural gas revenues were $54.5 million. The Energy segment's average sales price, excluding the impact of derivative financial instruments, was $89.7 per Bbl of oil, $35.2 per Bbl of natural gas liquids, and $3.7 per Mcf of natural gas. Our developmental activities in the Permian basin during the period included 11 wells spud and 12 wells completed. The production during the period consisted of 8.6 Bcfe from the East Texas/North Louisiana region and 2.3 Bcfe from the Permian basin. The production of the EXCO/HGI JV includes 1.9 Bcfe as a result of the acquisition of the Cotton Valley assets from the BG Group on March 5, 2013. Operating costs and expenses The Energy segment's oil and natural gas operating costs for the Fiscal 2013 Quarter were $11.4 million or $1.5 per Mcfe and for the period from inception to June 30, 2013 were $16.8 million or $1.5 per Mcfe. These costs primarily consisted of labor and overhead costs, chemical treatment programs, salt-water disposal costs, and other various costs associated with the operation of the wells. The Energy segment is currently focused on implementing programs to reduce our oil and natural gas operating costs. Gathering and transportation expenses totaled $2.7 million or $0.4 per Mcfe for the Fiscal 2013 Quarter, and totaled $4.0 million or $0.4 per Mcfe from inception to the period ended June 30, 2013. We utilize pipeline companies to facilitate sales of our East Texas/North Louisiana volumes and report these transportation costs as a component of gathering and transportation expenses. Production and ad valorem taxes were $4.0 million, or $0.5 per Mcfe, for the Fiscal 2013 Quarter, and were $6.0 million, or $0.5 per Mcfe, for the period from inception to June 30, 2013. The Energy segment's depletion expense for the Fiscal 2013 Quarter was $12.3 million, or $1.7 on a per Mcfe basis. Depletion expense was calculated using the unit-of-production method for the Energy segment's proved oil and natural gas properties. The Energy segment's depreciation costs for the Fiscal 2013 Quarter were $0.4 million. This depreciation relates to gas gathering assets in the East Texas/North Louisiana region. Accretion of discount                                         90

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  on asset retirement obligations for the Fiscal 2013 Quarter was $0.5 million. The Energy segment's depletion expense for the period from inception to June 30, 2013 was $18.0 million, or $1.7 on a per Mcfe basis. The Energy segment's depreciation costs for the period from inception to June 30, 2013 were $0.5 million. This depreciation relates to gas gathering assets in the East Texas/North Louisiana region. Accretion of discount on asset retirement obligations for the period from inception to June 30, 2013 was $0.7 million. General and administrative The Energy segment's general and administrative costs for the Fiscal 2013 Quarter were $1.5 million, or $0.2 per Mcfe, and for the period from inception to June 30, 2013 were $2.6 million, or $0.2 per Mcfe. Significant components of general and administrative expense for the Fiscal 2013 Quarter and for the period from inception to June 30, 2013, respectively, included (i) service agreement charges of $2.3 million and $3.6 million, respectively, related to accounting, legal, information technology, treasury, engineering, and other costs; (ii) Employee personnel costs of $1.2 million and $1.8 million, respectively, including salaries, bonuses, insurance and other benefits; (iii) Operator overhead reimbursements allocated to the working interest owners of our operated oil and natural gas properties of $2.1 million and $3.2 million, respectively; and (iv) Capitalized salaries related to the Energy segment's oil and natural gas exploration and production activities of $0.2 million and $0.3 million, respectively.  Summary of key financial data A summary of key financial data from inception to the period ended June 30, 2013 related to our proportionate 74.5% interest in the results of operations of the EXCO/HGI JV reported in the Energy segment is presented below:                                                            Fiscal Quarter     Fiscal Nine Months (dollars in millions, except per unit prices)                   2013                 2013 Production: Oil (Mbbls)                                                        119.0                177.0 Natural gas liquids (Mbbls)                                        126.0                180.0 Natural gas (Mmcf)                                               5,953.0              8,726.0 Total production (Mmcfe) (1)                                     7,423.0             10,868.0 Average daily production (Mmcfe)                                    81.6                 79.9 Revenues before derivative financial instrument activities: Oil                                                       $         10.8     $           15.9 Natural gas liquids                                                  4.3                  6.3 Natural gas                                                         22.7                 32.3 Total revenues                                            $         37.8     $           54.5

Oil and natural gas derivative financial instruments: Cash settlements (payments) on derivative financial instruments

                                               $         (1.9 )   $           (1.3 ) 

Non-cash change in fair value of derivative financial instruments

                                                         11.5                  2.1 

Total derivative financial instrument activities $ 9.6

  $            0.8 Average sales price (before cash settlements of derivative financial instruments): Oil (per Bbl)                                             $         90.8     $           89.7 Natural gas liquids (per Bbl)                                       34.0                 35.2 Natural gas (per Mcf)                                                3.8                  3.7 Natural gas equivalent (per Mcfe)                                    5.1                  5.0 Costs and expenses (per Mcfe): Oil and natural gas operating costs                       $          1.5     $            1.5 Production and ad valorem taxes                                      0.5                  0.5 Gathering and transportation                                         0.4                  0.4 Depletion                                                            1.7                  1.7 Depreciation and amortization                                        0.1                    - General and administrative                                           0.2                  0.2                                            91

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(1) Mmcfe is calculated by converting one barrel of oil or natural gas liquids

into six Mcf of natural gas.

    Financial Services Segment                                         Fiscal Quarter                              Fiscal Nine Months                                                        Increase /                                    Increase /                              2013         2012         (Decrease)          2013         2012         (Decrease)  Net investment income     $    9.4$    1.7     $           7.7     $   27.8$    2.1     $         25.7 Insurance and investment product fees and other         0.8            -                 0.8          1.7            -                1.7 Total Financial Services segment revenues              10.2          1.7                 8.5         29.5          2.1               27.4 Financial Services segment operating costs and expenses                   6.1          1.2                 4.9         12.9          2.6               10.3 Operating income (loss) - Financial Services segment                   $    4.1$    0.5     $           3.6     $   16.6$   (0.5 )   $         17.1    Operating Income (loss). Operating income (loss) from asset-backed loan financing and other asset-management activities in the Financial Services segment increased $3.6 million during the Fiscal 2013 Quarter to $4.1 million, from an operating loss of $0.5 million earned during the Fiscal 2012 Quarter. Operating income for the Fiscal 2013 Nine Months increased $17.1 million to $16.6 million, from an operating loss of $0.5 million earned during Fiscal 2012 Nine Months. The increases in operating income during the three and nine months are as a result of an increase in asset-backed loans originated by the operations of Salus, from $74.0 million in the Fiscal 2012 Quarter, to $433.3 million in the Fiscal 2013 Quarter.  Also contributing to operating income in the Fiscal 2013 Quarter and Nine Months was an increase in asset management fees earned from the Insurance segment by the operations of Five Island, a newly formed, wholly-owned asset management company, with $1.4 billion, as of June 30, 2013, in assets under management related to the Reinsurance Transaction.  

Corporate and Other Segment

Selling, acquisition, operating and general expenses. Selling, acquisition, operating and general expenses increased $5.1 million to $17.3 million for the Fiscal 2013 Quarter from $12.2 million for the Fiscal 2012 Quarter.

The $5.1 million increases in corporate expenses for the Fiscal Quarter is primarily due to the hiring of new personnel and an increase in overhead costs such as insurance during the Fiscal 2013 Quarter.

  Selling, acquisition, operating and general expenses increased $34.9 million to $68.2 million for the Fiscal 2013 Nine Months from $33.3 million for the Fiscal 2012 Nine Months. The $34.9 million increases in corporate expenses for the Fiscal Nine Months is primarily due to the hiring of new personnel and an increased bonus compensation accruals during the Nine Months based on an increase in HGI's net asset value ("Compensation NAV") determined in accordance with the criteria established by HGI's Compensation Committee (as discussed further under below), acquisition-related charges for the acquisition of HGI's interest in the EXCO/HGI JV, and an allocation of overhead costs from Harbinger Capital Partners LLC ("Harbinger Capital"), an affiliate. Consolidated operating costs and expenses for the remainder of Fiscal 2013 are expected to increase over the comparable three months of Fiscal 2012 as we continue to actively pursue our acquisition strategy and increase corporate oversight due to acquisitions, both of which have entailed the hiring of additional personnel at HGI, and experience continued growth at our subsidiaries. HGI's Compensation Committee has established annual salary, bonus and equity-based compensation arrangements with certain of HGI's corporate employees, including performance-based bonus targets based on the achievement of personal performance goals, and performance-based bonus targets based on performance measured in terms of the change in the value of HGI's Compensation NAV. Performance-based bonuses paid based on the growth of the Compensation NAV allow management to participate in a portion of HGI's performance. HGI's operating costs decreased by approximately $1.1 million for the Fiscal 2013 Quarter, and increased by approximately $11.8 million for the Fiscal 2013 Nine Months, as compared to the respective comparable prior fiscal periods, as a result of the accrual for these bonus compensation expenses. These respective decrease and                                         92

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  increase in the accrual amounts reflect the underlying performance and growth in the Compensation NAV, which has grown approximately 4.2% and 49.5% in the Fiscal 2013 Quarter and Nine Months, respectively. The current results of HGI would result in a mix of cash and equity awards being paid over the next two years if the growth in Compensation NAV is sustained. If the growth in Compensation NAV is sustained, we expect the remainder of Fiscal 2013 to have approximately $7.8 million of bonus compensation expense relating to the 2013 Compensation NAV and deferred cash awards related to the 2012 Compensation NAV. In addition, we expect to recognize approximately $20.2 million of deferred bonus compensation expense in Fiscal 2014 for the 2013 Compensation NAV and deferred cash awards relating to the 2012 Compensation NAV, subject to clawback provisions if the subsequent increase in Compensation NAV does not exceed specified threshold returns.  Non-GAAP Measures Adjusted EBITDA - Consumer Products. Spectrum Brands believes that certain non-US GAAP financial measures may be useful in certain instances to provide additional meaningful comparisons between current results and results in prior operating periods. Adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA") is a metric used by management and frequently used by the financial community. Adjusted EBITDA provides insight into an organization's operating trends and facilitates comparisons between peer companies, since interest, taxes, depreciation and amortization can differ greatly between organizations as a result of differing capital structures and tax strategies. Adjusted EBITDA can also be a useful measure of a company's ability to service debt and is one of the measures used for determining Spectrum Brands' debt covenant compliance. Adjusted EBITDA excludes certain items that are unusual in nature or not comparable from period to period. While management believes that non-US GAAP measurements are useful supplemental information, such adjusted results are not intended to replace the Company's US GAAP financial results. Adjusted EBITDA increased $3.5 million, or 1.9%, to $188.5 million for the Fiscal 2013 Quarter from $185.0 million for the Fiscal 2012 Quarter. The increase in Adjusted EBITDA was primarily a result of (i) increased sales, cost improvements and operating expense reductions at Spectrum Brands'Global Pet Supplies segment. These increases where partially offset by (i) the decrease in segment profit resulting from decreased sales, unfavorable product mix and pricing pressures in the U.S. for Spectrum Brands' Global Batteries and Appliances segments, and (ii) decreased sales in Spectrum Brands' Home and Garden segment due to the late arrival of warm weather. Adjusted EBITDA increased $2.8 million, or 0.6%, to $492.4 million for the Fiscal 2013 Nine Months from $489.6 million for the Fiscal 2012 Nine Months. The increase in Adjusted EBITDA was primarily a result of (i) increased sales, cost improvements and operating expense reductions at Spectrum Brands'Global Pet Supplies product line and (ii) a slight improvement in Spectrum Brands' Global Batteries and Appliances product line's profitability driven by the exit of low margin products in the small appliances category. These increases where partially offset by (i) increased cost of goods sold at Spectrum Brands'Global Pet Supplies product line resulting from unfavorable manufacturing variances driven by plant shutdowns during the fourth quarter of Fiscal 2012, (ii) the decrease in segment profit resulting from decreased sales, unfavorable product mix and pricing pressures in the U.S. for Spectrum Brands' Global Batteries and Appliances product line, and (iii) decreased sales in Spectrum Brands' Home and Garden product line due to the late arrival of warm weather.                                         93

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The table below shows the adjustments made to the reported operating income of the consumer products segment to calculate its Adjusted EBITDA:

                                                    Fiscal Quarter           Fiscal Nine Months Reconciliation to reported operating income:      2013         2012          2013          2012 Reported operating income - consumer products segment                               $  115.7$   95.2$   236.1$  234.2 Add: Other expense not included above              (2.6 )       (2.2 )        (7.9 )        (2.2 ) Add back: Net loss attributable to non-controlling interest                                              -            -             -             - HHI Business inventory fair value adjustment          -            -          31.0             - Pre-acquisition earnings of HHI Business              -         52.5          30.3         130.1 Restructuring and related charges                  13.2          3.9          27.7          15.9 Acquisition and integration related charges         7.7          5.2          40.5          20.6 Venezuela devaluation                                 -            -           2.0             - 

Adjusted EBIT - consumer products segment 134.0 154.6

  359.7         398.6 Depreciation and amortization, net of accelerated depreciation Depreciation of properties                         16.4          9.8          42.6          28.7 Amortization of intangibles                        20.3         16.1          57.5          46.5 Stock-based compensation                           17.8          4.5          32.6          15.8 Adjusted EBITDA - consumer products segment    $  188.5$  185.0     $  

492.4 $ 489.6

   Adjusted Operating Income - Insurance. Adjusted operating income is a non-US GAAP financial measure frequently used throughout the insurance industry and an economic measure FGL uses to evaluate financial performance each period. For the Fiscal 2013 Quarter, adjusted operating income increased $20.3 million to $23.7 million, or 597.1%, from $3.4 million for the Fiscal 2012 Quarter. This increase is primarily due to the non-recurrence of an $11.0 million charge for an estimated unreported death claims liability, net of reinsurance, recorded during the Fiscal 2012 Quarter resulting from a search of the Social Security Administration database that produced a listing of deceased policyholders that died while their policy was in force (see Note 16, Commitments and Contingencies for additional information regarding this charge). For the Fiscal 2013 Nine Months, adjusted operating income increased $46.7 million to $86.6 million, or 117.0%, from $39.9 million for the Fiscal 2012 Nine Months. This increase is primarily due to immediate annuity mortality gains of $27.3 million recognized in the Fiscal 2013 Nine Months caused by large case deaths, as discussed above in benefits and other changes in policy reserves, in addition to the absence of the $11.0 million charge for unclaimed death benefits recorded in the Fiscal 2012 Quarter as discussed above. The table below shows the adjustments made to the reported operating income of the insurance segment to calculate its adjusted operating income:                                                     Fiscal Quarter            Fiscal Nine Months Reconciliation to reported operating income:      2013          2012          2013           2012 Reported operating income - insurance segment                                        $    78.5$   (1.5 )$    351.5$   89.5 Effect of investment gains, net of offsets         (20.4 )      (17.2 )       (206.1 )       (72.2 ) Effect of change in FIA embedded derivative discount rate, net of offsets                      (34.4 )       17.9          (58.8 )        10.8 Effects of transaction-related reinsurance             -          4.2              -          11.8 Adjusted operating income - insurance segment                                        $    23.7$    3.4$     86.6$   39.9                                           94

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  Adjusted operating income is calculated by adjusting the reported insurance segment operating income to eliminate the impact of net investment gains, excluding gains and losses on derivatives and including net other-than-temporary impairment losses recognized in operations, the effect of changes in the rates used to discount the FIA embedded derivative liability and the effects of acquisition-related reinsurance transactions, net of the corresponding value of business acquired ("VOBA") and deferred acquisition costs ("DAC") impact related to these adjustments. These items fluctuate period to period in a manner inconsistent with FGL's core operations. Accordingly, we believe using a measure which excludes their impact is effective in analyzing the trends of FGL's operations. Together with reported operating income, we believe adjusted operating income enhances the understanding of underlying results and profitability which in turn provides a meaningful analysis tool for investors. Non-US GAAP measures such as adjusted operating income should not be used as a substitute for reported operating income. We believe the adjustments made to the reported operating income in order to derive adjusted operating income are significant to gaining an understanding of FGL's results of operations. For example, FGL could have strong operating results in a given period, yet report operating income that is materially less, if during the period the fair value of derivative assets hedging the FIA index credit obligations decreased due to general equity market conditions but the embedded derivative liability related to the index credit obligation did not decrease in the same proportion as the derivative asset because of non-equity market factors such as interest rate movements. Similarly, FGL could also have poor operating results yet report operating income that is materially greater, if during the period the fair value of the derivative assets increases but the embedded derivative liability increase is less than the fair value change of the derivative assets. FGL hedges FIA index credits with a combination of static and dynamic strategies, which can result in earnings volatility. The management and board of directors of FGL review adjusted operating income and reported operating income as part of their examination of FGL's overall financial results. However, these examples illustrate the significant impact derivative and embedded derivative movements can have on reported operating income. Accordingly, the management and board of directors of FGL perform an independent review and analysis of these items, as part of their review of hedging results each period. The adjustments to reported operating income noted in the table above are net of amortization of VOBA and DAC. Amounts attributable to the fair value accounting for derivatives hedging the FIA index credits and the related embedded derivative liability fluctuate from period to period based upon changes in the fair values of call options purchased to fund the annual index credits for FIAs, changes in the interest rates used to discount the embedded derivative liability, and the fair value assumptions reflected in the embedded derivative liability. The accounting standards for fair value measurement require the discount rates used in the calculation of the embedded derivative liability to be based on the risk-free interest rates. The impact of the change in risk-free interest rates has been removed from reported operating income. Additionally, in evaluating operating results, the effects of acquisition-related reinsurance transactions have been removed from reported operating income.  Adjusted EBITDA - Energy. Earnings before interest, taxes, depreciation, depletion and amortization, or "EBITDA" represents net income adjusted to exclude interest expense, income taxes and depreciation, depletion and amortization. "Adjusted EBITDA" represents EBITDA adjusted to exclude non-recurring other operating items, accretion of discount on asset retirement obligations, non-cash changes in the fair value of derivatives, non-cash write-downs of assets, and stock-based compensation. We have presented EBITDA and Adjusted EBITDA because they are a widely used measure by investors, analysts and rating agencies for valuations, peer comparisons and investment recommendations. In addition, these measures are used in covenant calculations required under our credit agreement. Compliance with the liquidity and debt incurrence covenants included in these agreements is considered material to us. Our computations of EBITDA and Adjusted EBITDA may differ from computations of similarly titled measures of other companies due to differences in the inclusion or exclusion of items in our computations as compared to those of others. EBITDA and Adjusted EBITDA are measures that are not prescribed by generally accepted accounting principles, or GAAP. EBITDA and Adjusted EBITDA specifically exclude changes in working capital, capital expenditures and other items that are set forth on a cash flow statement presentation of a company's operating, investing and financing activities. As such, we encourage investors not to use these measures as substitutes for the determination of net income, net cash provided by operating activities or other similar GAAP measures.                                         95

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The table below shows the adjustments made to the reported operating income of the EXCO/HGI JV to calculate its Adjusted EBITDA:

Fiscal Quarter     Fiscal Nine Months Reconciliation to reported operating income:                  2013          

2013

 Reported operating income - energy segment              $          4.8     $            5.3 Depreciation, amortization and depletion                          12.7                 18.5 EBITDA - energy segment                                           17.5                 23.8 Accretion of discount on asset retirement obligations              0.4                  0.7 Realized loss on derivative financial instruments                 (1.9 )               (1.3 ) Adjusted EBITDA - energy segment                        $         16.0     $           23.2                                            96

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Liquidity and Capital Resources

HGI

 HGI is a holding company and its liquidity needs are primarily for interest payments on the 7.875% Notes and the New Notes (approximately $72.8 million per year), dividend payments on its Preferred Stock (approximately $32.9 million per year), professional fees (including advisory services, legal and accounting fees), executive bonuses, salaries and benefits, office rent, pension expense, insurance costs, funding certain requirements of its insurance and other subsidiaries, and certain support services and office space provided by Harbinger Capital to HGI. HGI's current source of liquidity is its cash, cash equivalents and investments, and distributions from FGL, Spectrum Brands, the EXCO/HGI JV and Salus. During the Fiscal 2013 Nine Months, we received $108.7 million in dividends from FGL, Spectrum and Salus ($93.0 million, $15.0 million and $0.7 million, respectively). The FGL dividend of $93.0 million includes the special dividend of $73.0 million paid out of the proceeds from the $300.0 million aggregate principal amount of the FGL Notes. In addition, we received a benefit, in the form of a purchase price reduction of $22.7 million at the closing of the EXCO/HGI JV as a result of applying an economic effective date of July 1, 2012 to the transaction. We expect to receive approximately $25.9 million of dividends during the remainder of fiscal 2013. This includes approximately $7.7 million additional dividends for HGI's portion of a $0.25 per share quarterly dividend to be declared by Spectrum Brands to its stockholders, $15.0 million of dividends to be paid by the EXCO/HGI JV and $3.2 million of dividends to be paid by Salus. As a result, approximately $157.3 million, including the special dividend received from FGL and the purchase price reduction received at the closing of the EXCO/HGI JV, is expected to be received for the fiscal year ended September 30, 2013 which exceeds our expected cash requirements to satisfy interest and general and administrative expenses. The ability of HGI's subsidiaries to generate sufficient net income and cash flows to make upstream cash distributions is subject to numerous factors, including restrictions contained in such subsidiary's financing agreements, availability of sufficient funds in such subsidiary, applicable state laws and regulatory restrictions and the approval of such payment by such subsidiary's board of directors, which must consider various factors, including general economic and business conditions, tax considerations, strategic plans, financial results and condition, expansion plans, any contractual, legal or regulatory restrictions on the payment of dividends, and such other factors such subsidiary's board of directors considers relevant including, in the case of FGL, target capital ratios and ratio levels anticipated by regulatory agencies to maintain or improve current ratings (see "FGL" below for more detail). At the same time, HGI's subsidiaries may require additional capital to maintain or grow their businesses. Such capital could come from HGI, retained earnings at the relevant subsidiary or from third-party sources, including from the issuance of debt and/or equity by HGI or our subsidiaries. For example, Front Street Re, Ltd. ("Front Street"), a Bermuda-based reinsurer and wholly-owned subsidiary of ours, will require additional capital in order to engage in reinsurance transactions, and may require additional capital to meet regulatory capital requirements. In addition, FGL may issue debt and/or equity in the future to grow its business and/or pursue acquisition activities. HGI and FGL have also committed to provide Salus with capital and financing, in order to engage in asset based lending transactions. We expect our cash, cash equivalents and investments to continue to be a source of liquidity except to the extent they may be used to fund investments in operating businesses or assets. At June 30, 2013, HGI's corporate cash, cash equivalents and investments were $122.0 million. Based on current levels of operations, HGI does not have any significant capital expenditure commitments and management believes that its consolidated cash, cash equivalents and investments on hand will be adequate to fund its operational and capital requirements for at least the next twelve months. Depending on the size and terms of future acquisitions of operating businesses or assets, HGI and its subsidiaries may raise additional capital through the issuance of equity, debt, or both. There is no assurance, however, that such capital will be available at that time, in the amounts necessary or with terms satisfactory to HGI. We expect to service any such new additional debt through raising dividends received from our subsidiaries. We may also seek to retire or refinance our 7.875% Notes or Preferred Stock through open market purchases, tender offers, negotiated transactions or otherwise.                                          97

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Spectrum Brands Spectrum Brands expects to fund its cash requirements, including capital expenditures, dividend, interest and principal payments due during the remainder of Fiscal 2013 through a combination of cash on hand ($99.0 million at June 30, 2013) and cash flows from operations and available borrowings under its ABL revolving credit facility (the "ABL Facility"). Spectrum Brands expects its capital expenditures for the remaining three months of Fiscal 2013 will be approximately $24.8 million to $34.8 million. Going forward, its ability to satisfy financial and other covenants in its senior credit agreements and senior unsecured indentures and to make scheduled payments or prepayments on its debt and other financial obligations will depend on its future financial and operating performance. There can be no assurances that its business will generate sufficient cash flows from operations or that future borrowings under the ABL Facility will be available in an amount sufficient to satisfy its debt maturities or to fund its other liquidity needs. Subsequent to October 1, 2011, Spectrum Brands is not treating current foreign earnings as permanently reinvested. At June 30, 2013, there are no significant foreign cash balances available for repatriation. For the remainder of Fiscal 2013, Spectrum Brands expects to generate between $75.0 million and $100.0 million of foreign cash that will be repatriated for its general corporate purposes. From time to time we or Spectrum Brands may purchase outstanding securities of Spectrum Brands or its subsidiaries, in the open market or otherwise.  

FGL

 FGL conducts all its operations through operating subsidiaries. Dividends from its subsidiaries are the principal sources of cash to pay dividends to HGI and to meet its holding company obligations. Other principal sources of cash include sales of assets. In addition, FGL may issue debt and/or equity in the future to grow its business and/or pursue acquisition activities. In March 2013, FGL issued $300.0 million aggregate principal amount of its 6.375% senior notes due April 1, 2021, at par value. FGL expects to use the net proceeds from the issuance of the notes for general corporate purposes, to support the growth of its subsidiary life insurance company and to pay a $75.0 million dividend, of which $73.0 million was paid to HGI on March 28, 2013. The liquidity requirements of FGL's regulated insurance subsidiaries principally relate to the liabilities associated with their various insurance and investment products, operating costs and expenses, the payment of dividends to FGL and income taxes. Liabilities arising from insurance and investment products include the payment of benefits, as well as cash payments in connection with policy surrenders and withdrawals, policy loans and obligations to redeem funding agreements. FGL's insurance subsidiaries have used cash flows from operations and investment activities to fund their liquidity requirements. FGL's insurance subsidiaries' principal cash inflows from operating activities are derived from premiums, annuity deposits and insurance and investment product fees and other income. The principal cash inflows from investment activities result from repayments of principal, investment income and, as necessary, sales of invested assets. FGL's insurance subsidiaries maintain investment strategies intended to provide adequate funds to pay benefits without forced sales of investments. Products having liabilities with longer durations, such as certain life insurance, are matched with investments having similar estimated lives such as long-term fixed maturity securities. Shorter-term liabilities are matched with fixed maturity securities that have short- and medium-term fixed maturities. In addition, FGL's insurance subsidiaries hold highly liquid, high-quality short-term investment securities and other liquid investment grade fixed maturity securities to fund anticipated operating expenses, surrenders and withdrawals. The ability of FGL's subsidiaries to pay dividends and to make such other payments is limited by applicable laws and regulations of the states in which its subsidiaries are domiciled, which subject its subsidiaries to significant regulatory restrictions. These laws and regulations require, among other things, FGL's insurance subsidiaries to maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay. Along with solvency regulations, the primary driver in determining the amount of capital used for dividends is the level of capital needed to maintain desired financial strength ratings from the rating agencies. In that regard, we may                                         98

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  limit dividend payments from our major insurance subsidiary to the extent necessary for its risk based capital ratio to be at a level anticipated by the ratings agencies to maintain or improve its current rating. Given recent economic events that have affected the insurance industry, both regulators and rating agencies could become more conservative in their methodology and criteria, including increasing capital requirements for FGL's insurance subsidiaries which, in turn, could negatively affect the cash available to FGL from its insurance subsidiaries and, in turn, to us. FGL monitors its insurance subsidiaries' compliance with the risk based capital requirements specified by the National Association of Insurance Commissioners (the "NAIC"). As of June 30, 2013, each of FGL's insurance subsidiaries has exceeded the minimum risk based capital requirements.  FGL's Investment Portfolio The types of assets in which FGL may invest are influenced by various state laws, which prescribe qualified investment assets applicable to insurance companies. Within the parameters of these laws, FGL invests in assets giving consideration to three primary investment objectives: (i) income-oriented total return, (ii) yield maintenance/enhancement and (iii) capital preservation/risk mitigation. FGL's investment portfolio is designed to provide a stable earnings contribution and balanced risk portfolio across asset classes and is primarily invested in high quality corporate bonds with low exposure to consumer-sensitive sectors. As of June 30, 2013 and September 30, 2012, FGL's investment portfolio was approximately $16.1 billion and $16.6 billion, respectively, and was divided among the following asset classes (dollars in millions):                                              June 30, 2013               September 30, 2012 Asset Class                            Fair Value       Percent       Fair Value       Percent Asset-backed securities               $   1,437.5           8.9 %   $    1,027.9           6.2 % Commercial mortgage-backed securities                                  523.9           3.3 %          553.8           3.3 % Corporates                               10,212.8          63.4 %       11,009.0          66.5 % Equities                                    269.8           1.7 %          248.1           1.5 % Hybrids                                     508.3           3.2 %          528.2           3.2 % Municipals                                1,036.9           6.4 %        1,224.0           7.4 % Agency residential mortgage-backed securities                                  111.0           0.7 %          155.0           0.9 % Non-agency residential mortgage-backed securities                1,353.9           8.4 %          660.6           4.0 % U.S. Government                             394.0           2.4 %          930.4           5.6 % Other (primarily derivatives, policy loans and other invested assets)                                     255.0           1.6 %          219.5           1.4 % Total investments                     $  16,103.1         100.0 %   $   16,556.5         100.0 %    Fixed Maturity Securities Insurance statutes regulate the type of investments that FGL's life subsidiaries are permitted to make and limit the amount of funds that may be used for any one type of investment. In light of these statutes and regulations and FGL's business and investment strategy, FGL generally seeks to invest in United States government and government-sponsored agency securities and corporate securities rated investment grade by established nationally recognized statistical rating organizations (each, an "NRSRO") or in securities of comparable investment quality, if not rated.                                         99

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As of June 30, 2013 and September 30, 2012, FGL's fixed maturity available-for-sale portfolio was approximately $15.6 billion and $16.1 billion, respectively. The following table summarizes the credit quality, by NRSRO rating, of FGL's fixed income portfolio (dollars in millions):

                   June 30, 2013           September 30, 2012 Rating         Fair Value    Percent     Fair Value     Percent AAA           $   1,176.4       7.6 %   $    1,842.3      11.4 % AA                2,559.3      16.4 %        2,042.9      12.7 % A                 4,150.2      26.7 %        4,280.4      26.6 % BBB               5,925.0      38.0 %        7,084.0      44.0 % BB                  499.9       3.2 %          459.0       2.9 %

B and below 1,267.5 8.1 % 380.3 2.4 % Total $ 15,578.3 100.0 % $ 16,088.9 100.0 %

   The increase in securities rated below investment grade by NSRSOs is largely attributable to the increase in non-agency RMBS securities.  We evaluate the risk profile of our investments using the NAIC rating as is standard in our industry.  Since 2009, the NAIC has utilized a process to assess the credit risk of non-agency RMBS and CMBS  which does not rely on NSRSO ratings.  Our activity in this category has focused on securities at appropriate purchase points that have a NAIC rating of 1.  The remainder of the increase in the below investment grade area relates to the ramp up of the assets managed by Five Island as part of the reinsurance transaction with Front Street Cayman and downgrades from high grade to below investment grade of existing holdings. The NAIC's Securities Valuation Office ("SVO") is responsible for the day-to-day credit quality assessment and valuation of securities owned by state regulated insurance companies. Insurance companies report ownership of securities to the SVO when such securities are eligible for regulatory filings. The SVO conducts credit analysis on these securities for the purpose of assigning an NAIC designation and/or unit price. Typically, if a security has been rated by an NRSRO, the SVO utilizes that rating and assigns an NAIC designation based upon the following system:  NAIC Designation   NRSRO Equivalent Rating 1                         AAA/AA/A 2                            BBB 3                            BB 4                             B 5                       CCC and lower 6                    In or near default   In November 2011, the NAIC membership approved continuation of a process developed in 2009 to assess non-agency residential mortgage-backed securities for the 2011 filing year that does not rely on NRSRO ratings. The NAIC retained the services of PIMCO Advisory to model each non-agency residential mortgage-backed security owned by U.S. insurers at year end 2011 and 2010. PIMCO Advisory has provided 5 prices for each security for life insurance companies to utilize in determining the NAIC designation for each residential mortgage-backed security based on each insurer's statutory book value price. This process is used to determine the level of risk-based capital ("RBC") requirements for non-agency residential mortgage-backed securities.                                        100

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The tables below present FGL's fixed maturity securities by NAIC designation as of June 30, 2013 and September 30, 2012 (dollars in millions):

June 30, 2013September 30, 2012                                                          Percent of Total                                         Percent of Total 

NAIC Designation Amortized Cost Fair Value Fair Value

   Amortized Cost       Fair Value        Fair Value 1                  $        8,951.7$    9,243.2           59.3 %       $        8,070.1$    8,634.0           53.6 % 2                           5,727.7          5,812.0           37.3 %                6,569.1          7,047.4           43.8 % 3                             386.2            402.4            2.6 %                  381.3            386.4            2.4 % 4                              77.2             75.8            0.5 %                    8.5              8.8            0.1 % 5                              40.5             40.4            0.3 %                    8.2              8.2            0.1 % 6                               2.0              4.5              - %                    3.8              4.1              - %                    $       15,185.3$   15,578.3          100.0 %       $       15,041.0$   16,088.9          100.0 %   

Unrealized Losses The amortized cost and fair value of fixed maturity securities and equity securities that were in an unrealized loss position as of June 30, 2013 and September 30, 2012 were as follows (dollars in millions):

                                            June 30, 2013                                                      September 30, 2012                   Number of      Amortized                                             Number of      Amortized                   securities        Cost        Unrealized Losses      Fair Value      securities        Cost        Unrealized Losses      Fair Value Fixed maturity securities, available for sale: United States Government full faith and credit         20     $    204.3     $            (3.9 )   $      200.4              6     $      0.9     $            (0.2 )   $        0.7 United States Government sponsored agencies                 13            7.7                  (0.4 )            7.3             10            7.3                  (0.1 )            7.2 United States municipalities, states and territories              69          479.7                 (27.4 )          452.3             18           72.2                  (1.1 )           71.1 Corporate securities: Finance, insurance and real estate             171        1,834.1                 (69.6 )        1,764.5             31          241.7                  (4.9 )          236.8 Manufacturing, construction and mining                   45          484.1                 (36.5 )          447.6             10           95.6                  (3.0 )           92.6 Utilities and related sectors          69          513.2                 (17.4 )          495.8              7           48.5                  (0.4 )           48.1 Wholesale/retail trade                    45          364.6                 (12.9 )          351.7              7           59.1                  (1.3 )           57.8 Services, media and other                55          497.0                 (27.1 )          469.9              4           21.9                  (0.4 )           21.5 Hybrid securities                9          119.2                  (3.1 )          116.1              8          130.7                  (9.6 )          121.1 Non-agency residential mortgage-backed securities               76          334.0                  (9.3 )          324.7             26          119.0                  (4.3 )          114.7 Commercial mortgage-backed securities                8           29.4                  (0.7 )           28.7              9           13.9                  (2.4 )           11.5 Asset-backed securities               49          382.8                  (4.6 )          378.2             17          178.9                  (1.6 )          177.3 Equity securities               14          129.4                  (4.6 )          124.8              3           45.8                  (1.3 )           44.5                         643     $  5,379.5     $          (217.5 )   $    5,162.0            156     $  1,035.5     $           (30.6 )   $    1,004.9    The gross unrealized loss position on the portfolio at June 30, 2013, was $217.5 million, a decline from $30.6 million at September 30, 2012. The following is a description of the factors causing the unrealized losses by investment category as of June 30, 2013:  Through June 30, 2013, Treasury yields climbed as concerns about the cessation of Federal Reserve stimulus affected market participants. Bond mutual fund flows turned sharply negative in the last months of the quarter,                                        101

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  and fixed income security prices declined accordingly. Longer dated assets, such as municipal bonds, were particularly affected and account for $27.4 million of the unrealized loss position; to date, this sector has not seen material price movements and FGL views the recent price action in municipal bonds as largely interest-rate related. Finance and finance-related corporates and hybrids remain the largest component of the $72.7 million unrealized loss position. FGL views the increase in the unrealized loss position as a function of higher Treasury yields. The unrealized loss position in non-agency RMBS increased from $4.3 million to $9.3 million as the risk-off trade affected more market sensitive asset classes, and as concerns about the strength and duration of the housing recovery affected real estate sensitive assets. These recent developments notwithstanding, FGL continues to see the underlying fundamentals in this asset class as supportive, and ultimately, less subject to interest rate volatility. FGL continues to find opportunities in non-agency residential mortgage-backed holdings, generally targeting those securities with NAIC-1 ratings.  The amortized cost and fair value of fixed maturity securities and equity securities (excluding United States Government and United States Government sponsored agency securities) in an unrealized loss position greater than 20% and the number of months in an unrealized loss position with fixed maturity securities that carry an NRSRO rating of BBB/Baa or higher considered investment grade as of June 30, 2013, were as follows:  As of June 30, 2013 FGL held 6 securities that had unrealized losses greater than 20% that were in an unrealized loss position less than 6 months, FGL didn't hold any securities that were in an unrealized loss position greater than 6 months but less than 12 months and FGL held 2 securities that were in an unrealized loss position greater than 12 months. This included 6 investment grade securities (NRSRO rating of BBB/Baa or higher) with an amortized cost and estimated fair value of $33.6 million and $25.2 million, respectively as well as 2 securities below investment grade with an amortized cost and estimated fair value of less than $0.1 million in both periods.  As of September 30, 2012 FGL held 4 securities that had unrealized losses greater than 20% that were in an unrealized loss position greater than 6 months and 1 security that was in an unrealized loss position greater than 12 months. This included 3 investment grade securities (NRSRO rating of BBB/Baa or higher) with an amortized cost and estimated fair value of $2.6 million</money> and $0.9 million, respectively, as well as 2 securities below investment grade with an amortized cost and estimated fair value of $0.8 million and $0.5 million, respectively.                                            June 30, 2013                                                         September 30, 2012                 Number of                                          Gross Unrealized     Number of                                           Gross Unrealized                 securities      Amortized Cost      Fair Value          Losses          securities      Amortized Cost       Fair Value          Losses Investment grade: Less than six months                  4     $           33.2     $      25.2$       (8.0 )               -     $              -     $          -     $          - Six months or more and less than twelve months                  -                    -               -                -                 3                  2.6              0.9             (1.7 ) Twelve months or greater              2                  0.4               -             (0.4 )               -                    -                -                - Total investment grade                   6                 33.6            25.2             (8.4 )               3                  2.6              0.9             (1.7 )  Below investment grade: Less than six months                  2                    -               -                -                 -                    -                -                - Six months or more and less than twelve months                  -                    -               -                -                 1                  0.8              0.5             (0.3 ) Twelve months or greater              -                    -               -                -                 1                    -                -                - Total below investment grade                   2                    -               -                -                 2                  0.8              0.5             (0.3 )  Total                   8     $           33.6     $      25.2$       (8.4 )               5     $            3.4     $        1.4$       (2.0 )

Exposure to European Sovereign Debt

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  FGL had no exposure to foreign sovereign debt at June 30, 2013. Other-Than-Temporary Impairments and Watch List FGL has a policy and process in place to identify securities in its investment portfolio for which it should recognize impairments. At each balance sheet date, FGL identifies invested assets which have characteristics (i.e. significant unrealized losses compared to amortized cost and industry trends) creating uncertainty as to FGL's future assessment of an other-than-temporary impairment. As part of this assessment, FGL reviews not only a change in current price relative to its amortized cost but the issuer's current credit rating and the probability of full recovery of principal based upon the issuer's financial strength. Specifically for corporate issues, FGL evaluates the financial stability and quality of asset coverage for the securities relative to the term to maturity for the issues FGL owns. On a quarterly basis, FGL reviews structured securities for changes in default rates, loss severities and expected cash flows for the purpose of assessing potential other-than-temporary impairments and related credit losses to be recognized in operations. A security which has a 20% or greater change in market price relative to its amortized cost and a possibility of a loss of principal will be included on a list which is referred to as FGL's watch list. At June 30, 2013 and September 30, 2012, FGL's watch list included only 10 and 9 securities in an unrealized loss position with an amortized cost of $33.6 million and $4.0 million, unrealized losses of $8.4 million and $1.5 million, and fair value of $25.3 million and $2.5 million, respectively. There were 6 and 9 structured securities on the watch list as of June 30, 2013 and September 30, 2012, respectively. FGL's analysis of these structured securities included cash flow testing results which demonstrated the June 30, 2013 carrying values were fully recoverable. Available-For-Sale Securities For additional information regarding FGL's available-for-sale securities, including the amortized cost, gross unrealized gains (losses), and fair value of available-for-sale securities as well as the amortized cost and fair value of fixed maturity available-for-sale securities by contractual maturities as of June 30, 2013 refer to Note 4, Investments, to our Condensed Consolidated Financial Statements. Net Investment Income and Net investment gains (losses) For discussion regarding FGL's net investment income and net investment gains refer to Note 4, Investments, to our Condensed Consolidated Financial Statements. Concentrations of Financial Instruments For detail regarding FGL's concentration of financial instruments refer to Note 4, Investments, to our Condensed Consolidated Financial Statements. Derivatives For additional information regarding FGL's derivatives refer to Note 5, Derivative Financial Instruments, to our Condensed Consolidated Financial Statements. FGL is exposed to credit loss in the event of nonperformance by its counterparties on the call options. FGL attempts to reduce the credit risk associated with such agreements by purchasing such options from large, well-established financial institutions. FGL will also hold cash and cash equivalents received from counterparties for call option collateral, as well as Government securities pledged as call option collateral, if its counterparty's net exposures exceed pre-determined thresholds. See Note 5, Derivative Financial Instruments, for additional information regarding FGL's exposure to credit loss on call options.  HGI Energy and the EXCO/HGI JV The EXCO/HGI JV's primary sources of capital resources and liquidity are internally generated cash flows from operations and borrowing capacity under the EXCO/HGI JV Credit Agreement. While the EXCO/HGI JV believes that the existing capital resources, including cash flows from operations and borrowing capacity under the EXCO/                                        103

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  HGI JV Credit Agreement, will be sufficient to conduct its operations in the foreseeable future, there are certain risks arising from the declines in oil and natural gas prices that could impact the EXCO/HGI JV's ability to meet debt covenants in future periods. In particular, the ratio of consolidated funded indebtedness to consolidated earnings before interest, taxes, depreciation, amortization and exploration expenses ("EBITDAX"), as defined in the EXCO/HGI JV Credit Agreement, is computed using a last quarter annualized computation of EBITDAX. After the first year of the EXCO/HGI JV's operations, EBITDAX is computed based on the trailing twelve month period. As a result, the EXCO/HGI JV's ability to maintain compliance with this covenant is negatively impacted when oil and/or natural gas prices and production decline over an extended period of time. The total fiscal 2013 capital budget for the EXCO/HGI JV is $20.2 million on a consolidated basis. The EXCO/HGI JV plans to run one rig in its Permian area primarily targeting the Canyon Sand formation. The capital program also includes recompletion projects in North Louisiana targeting the Hosston formation. The EXCO/HGI JV's program targets high probability of success projects that provide acceptable rates of return in the current commodity price environment. The following table presents a proportionate interest in the EXCO/HGI JV's capital expenditures for the period from inception to June 30, 2013 and the expected capital expenditures for the remainder of 2013.                                           From Inception                                           to the Period       July-September         Full Year                                           Ended June 30,         Forecast             Forecast (in millions)                                  2013                2013                 2013 Capital expenditures: Development capital                       $       13.1     $              5.1     $         18.2 Gas gathering and water pipelines                  0.1                    0.1                0.2 Lease acquisitions and seismic                       -                      -                  - Corporate and other                                1.2                    0.6                1.8   Total                                   $       14.4     $              5.8     $         20.2 HGI's Proportionate 74.5% Share           $       10.7     $              

4.3 $ 15.0

The EXCO/HGI JV believes its current capital expenditure budget for 2013 will meet its operational objectives while maintaining sufficient liquidity. The following table presents HGI's proportionate interest and the consolidated EXCO/HGI JV's liquidity and financial position as of June 30, 2013:

                                                         HGI's Proportionate                                                               Interest           EXCO/HGI JV                                                               June 30,            June 30, (in millions)                                                   2013                2013 Borrowings under the EXCO/HGI JV Credit Agreement        $           274.9     $       369.0 Cash                                                                  12.8              17.2 Net debt                                                 $           262.1     $       351.8 Borrowing base                                           $           350.2     $       470.0 Unused borrowing base (1)                                             74.9             100.5 Unused borrowing base plus cash (1)                                   87.7             117.7   (1) Net of letters of credit. Events affecting liquidity Although weaknesses in natural gas prices continue, the EXCO/HGI JV believes that its capital resources from existing cash balances, anticipated cash flow from operating activities and available borrowing capacity under the EXCO/HGI JV Credit Agreement will be adequate to execute its corporate strategies and to meet debt service obligations. The EXCO/HGI JV expects the natural gas markets to continue to experience an extended period of low prices due to excess supply. Accordingly, the EXCO/HGI JV is carefully monitoring its capital budget and may implement further initiatives to provide additional liquidity.                                        104

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  Other factors which could impact the EXCO/HGI JV's liquidity, capital resources and capital commitments in 2013 and future years include (i) the results of its ongoing drilling programs; (ii) its ability to reduce and maintain lower operating, general and administrative expenses and capital expenditure programs in response to volatile oil and natural gas prices; (iii) the percentage of its production covered by derivative financial instruments; (iv) potential acquisitions and/or sales of oil and natural gas properties or other assets; (v) reductions to its borrowing base; and (vi) its ability to maintain compliance with debt covenants as a result of volatile oil and natural gas prices. As of June 30, 2013, EXCO/HGI JV's consolidated debt was $274.9 million which consisted of its proportionate share of the EXCO/HGI JV Credit Agreement. The total borrowings under the EXCO/HGI Credit Agreement were $369.0 million and the borrowing base was $470.0 million. The agreement contains certain restrictions that require that the EXCO/HGI JV maintain certain financial covenants.                                        105

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As of June 30, 2013, the EXCO/HGI JV was in compliance with each of the financial covenants under the EXCO/HGI JV Credit Agreement:

• the EXCO/HGI JV's consolidated current ratio (as defined in the agreement)

of 3.5 to 1.0 exceeded the minimum of at least 1.0 to 1.0 as of the end of

the fiscal quarter; and

• the EXCO/HGI JV's ratio of consolidated funded indebtedness (as defined in

       the agreement) to consolidated EBITDAX (as defined in the agreement) of        3.7 to 1.0 did not exceed the maximum of 4.5 to 1.0 at the end of the        fiscal quarter.   Derivative financial instruments The EXCO/HGI JV uses oil and natural gas derivatives and financial risk management instruments to manage its exposure to commodity prices. The EXCO/HGI JV does not designate these instruments as hedging instruments for financial accounting purposes and, accordingly, recognizes the change in the respective instruments' fair value currently in earnings, as a gain or loss on oil and natural gas derivatives on financial risk management instruments. The EXCO/HGI JV has entered into derivative contracts for approximately 76.8% of production volumes for the three months ended June 30, 2013 and approximately 69.7% of production volumes for the period from inception to June 30, 2013. In addition, the EXCO/HGI JV periodically enters into oil and natural gas derivative contracts for a portion of its production when market conditions are deemed favorable and oil and natural gas prices exceed minimum internal price targets. The EXCO/HGI JV's objective in entering into oil and natural gas derivative contracts is to mitigate the impact of price fluctuations and achieve a more predictable cash flow associated with its operations. The EXCO/HGI JV's oil and natural gas derivative instruments are currently comprised of swap contracts. Swap contracts allow it to receive a fixed price and pay a floating market price to the counterparty for the hedged commodity. These transactions limit exposure to declines in prices, but also limit the benefits the EXCO/HGI JV would realize if oil and natural gas prices increase. As of June 30, 2013, the EXCO/HGI JV had derivative financial instruments in place for the volumes and prices shown below:                                                   Weighted                                  NYMEX gas         average         NYMEX oil       Weighted average                                  volume -      contract price      volume -       contract price per                                   Mmmbtu          per Mmbtu          Mbbls               Bbls Swaps: Q4 2013                            5,140.0     $        3.72           103.0     $            94.05 Q1 2014                            5,141.0     $        3.72           103.0     $            94.05 

Q2 2014 through Q1 2015 10,877.0 $ 4.14 272.0 $

            91.87   

The EXCO/HGI JV's natural gas and oil derivative instruments are comprised of swap contracts. Swap contracts allow it to receive a fixed price and pay a floating market price to the counterparty for the hedged commodity.

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