ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXECUTIVE SUMMARY International Paper’s operating results in 2006 benefited from strong gains in pricing and sales volumes and lower operating costs.
Our average paper and packaging prices in 2006 increased faster than our costs for the first time in four years.
The improvement in sales volumes reflects increased uncoated papers, corrugated box, coated paperboard and European papers shipments, as well as improved revenues from our xpedx distribution business.
Our manufacturing operations also made solid cost reduction improvements.
Lower interest expense, reflecting debt repayments in 2005 and 2006, was also a positive factor.
Together, these improvements more than offset the effects of continued high raw material and distribution costs, lower real estate sales, higher net corporate expenses and lower contributions from businesses and forestlands divested during 2006.
Looking forward to 2007, we expect seasonally higher sales volumes in the first quarter.
Average paper price realizations should continue to improve as we implement previously announced price increases in Europe and Brazil.
Input costs for energy, fiber and chemicals are expected to be mixed, although slightly higher in the first quarter.
Operating results will benefit from the recently completed International Paper/Sun Paperboard joint ventures in China and the addition of the Luiz Antonio paper mill to our operations in Brazil.
However, primarily as a result of lower real estate sales in the first quarter, we anticipate earnings from continuing operations will be somewhat lower than in the 2006 fourth quarter.
Significant steps were also taken in 2006 in the execution of the Company’s Transformation Plan.
We completed the sales of our U. S.  and Brazilian Coated Papers businesses and 5.6 million acres of U. S.  forestlands, and announced definitive sale agreements for our Kraft Papers, Beverage Packaging and Arizona Chemical businesses and a majority of our Wood Products business, all expected to close during 2007.
Through December 31, 2006, we have received approximately $9.7 billion of the estimated proceeds from divestitures announced under this plan of approximately $11.3 billion, with the balance to be received as the remaining divestitures are completed in the first half of 2007.
We have strengthened our balance sheet by reducing debt by $6.2 billion, and returned value to our shareholders by repurchasing 39.7 million shares of our common stock for approximately $1.4 billion.
We made a $1.0 billion voluntary contribution to our U. S.  qualified pension fund.
We have identified selective reinvestment opportunities totaling approximately $2.0 billion, including opportunities in China, Brazil and Russia.
Finally, we remain focused on our three-year $1.2 billion target for non-price profitability improvements, with $330 million realized during 2006.
While more remains to be done in 2007, we have made substantial progress toward achieving the objectives announced at the outset of the Plan in July 2005.
Results of Operations Industry segment operating profits are used by International Paper’s management to measure the earnings performance of its businesses.
Management believes that this measure allows a better understanding of trends in costs, operating efficiencies, prices and volumes.
Industry segment operating profits are defined as earnings before taxes and minority interest, interest expense, corporate items and corporate special items.
Industry segment operating profits are defined by the Securities and Exchange Commission as a non-GAAP financial measure, and are not GAAP alternatives to net income or any other operating measure prescribed by accounting principles generally accepted in the United States.
International Paper operates in six segments: Printing Papers, Industrial Packaging, Consumer Packaging, Distribution, Forest Products and Specialty Businesses and Other.
The following table shows the components of net earnings (loss) for each of the last three years:
## Table 0 ##
* Corporate special items include gains on Transformation Plan forestland sales, goodwill impairment charges, restructuring and other charges, net losses on sales and impairments of businesses, insurance recoveries and reversals of reserves no longer required.
Market Risk Related to Equity Prices We have exposure to equity risk through asset/liability mismatches, including our investments in equity securities held in our general account investment portfolio and unhedged exposure in our insurance liabilities, principally related to certain variable annuity living benefit feature embedded derivatives.
Our equity-based derivatives primarily hedge the equity risk embedded in these living benefit feature embedded derivatives, and are also part of our capital hedging program.
Changes in equity prices create risk that the resulting changes in asset values will differ from the changes in the value of the liabilities relating to the underlying or hedged products.
Additionally, changes in equity prices may impact other items including, but not limited to, the following: ?
Asset-based fees earned on assets under management or contractholder account value; ?
Estimated total gross profits and the amortization of deferred policy acquisition and other costs; and ?
Net exposure to the guarantees provided under certain products.
We manage equity risk against benchmarks in respective markets.
We benchmark our return on equity holdings against a blend of market indices, mainly the S&P 500 and Russell 2000 for U. S.  equities.
We benchmark foreign equities against the Tokyo Price Index, and the MSCI EAFE, a market index of European, Australian, and Far Eastern equities.
We target price sensitivities that approximate those of the benchmark indices.
We estimate our equity risk from a hypothetical 10% decline in equity benchmark market levels.
The following table sets forth the net estimated potential loss in fair value from such a decline as of December 31, 2015 and 2014.
While these scenarios are for illustrative purposes only and do not reflect our expectations regarding future performance of equity markets or of our equity portfolio, they represent near-term reasonably possible hypothetical changes that illustrate the potential impact of such events.
These scenarios consider only the direct impact on fair value of declines in equity benchmark market levels and not changes in asset-based fees recognized as revenue, changes in our estimates of total gross profits used as a basis for amortizing deferred policy acquisition and other costs, or changes in any other assumptions such as market volatility or mortality, utilization or persistency rates in our variable annuity contracts that could also impact the fair value of our living benefit features.
In addition, these scenarios do not reflect the impact of basis risk, such as potential differences in the performance of the investment funds underlying the variable annuity products relative to the market indices we use as a basis for developing our hedging strategy.
The impact of basis risk could result in larger differences between the change in fair value of the equity-based derivatives and the related living benefit features in comparison to these scenarios.
In calculating these amounts, we exclude separate account equity securities.
## Table 1 ##
(1) Includes equity securities classified as “trading account assets supporting insurance liabilities” and other equity securities classified as trading securities under U. S.  GAAP, but are held for “other than trading” activities in our segments that offer insurance, retirement and annuities products.
(2) The notional and fair value of equity-based derivatives and the fair value of variable annuity and other living benefit feature embedded derivatives are also reflected in amounts under “Market Risk Related to Interest Rates” above, and are not cumulative.
(3) Excludes any offsetting impact of derivative instruments purchased to hedge changes in the embedded derivatives.
Amounts reported net of third-party reinsurance.
Market Risk Related to Foreign Currency Exchange Rates As a U. S. -based company with significant business operations outside of the U. S. , particularly in Japan, we are exposed to foreign currency exchange rate risk related to these operations, as well as in our general account investment portfolio and other proprietary investment portfolios.
For our international insurance operations, changes in foreign currency exchange rates create risk that we may experience volatility in the U. S.  dollar-equivalent earnings and equity of these operations.
We actively manage this risk through various hedging strategies, including the use of foreign currency hedges and through holding U. S.  dollar-denominated securities in the investment portfolios of certain of these operations.
Additionally, our Japanese insurance operations offer a variety of non-yen denominated products which are supported by investments in corresponding currencies.
While these non-yen denominated assets are economically matched, the accounting may differ for changes in the value of these assets and liabilities due to moves in foreign currency exchange rates, resulting in volatility in reported U. S.  GAAP earnings.
Beginning in 2015 we have mitigated this volatility through the implementation of a new structure in Gibraltar Life that disaggregated the U. S.  and Australian dollar-denominated businesses into separate divisions, each with its own functional currency that aligns with the underlying products and investments.
For certain of our international insurance operations outside of Japan, we elect to not hedge the risk of changes in our equity investments due to foreign exchange rate movements.
For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—International Insurance Division—Impact of foreign currency exchange rate movements on earnings—U.
S.  GAAP earnings impact of products denominated in non-local currencies” above.
For our domestic general account investment portfolios supporting our U. S.  insurance operations and other proprietary investment portfolios, our foreign currency exchange rate risk arises primarily from investments that are denominated in foreign currencies.
We manage this risk by hedging substantially all domestic foreign currency denominated fixed income investments into U. S.  dollars.
We generally do not hedge all of the foreign currency risk of our investments in equity securities of unaffiliated foreign entities.
PRUDENTIAL FINANCIAL, INC.  Notes to Consolidated Financial Statements Prudential Financial made a Section 338(g) election under the Internal Revenue Code with respect to this acquisition, resulting in the acquired entity being treated for U. S.  tax purposes as a newly-incorporated company.
Under such election, the U. S.  tax basis of the assets acquired and liabilities assumed of UniAsia Life Assurance Berhad was adjusted as of January 2, 2014, to reflect the consequences of the Section 338(g) election.
Acquisition of The Hartford’s Individual Life Insurance Business In January 2013, the Company acquired the Hartford Life Business through a reinsurance transaction.
Under the agreement, the Company paid cash consideration of $615 million, primarily in the form of a ceding commission to provide reinsurance for approximately 700,000 life insurance policies with net retained face amount in force of approximately $141 billion.
The acquisition increased the Company’s scale in the U. S.  individual life insurance market, particularly universal life products, and provides complementary distribution opportunities through expanded wirehouse and bank distribution channels.
The assets acquired and liabilities assumed have been included in the Company’s Consolidated Financial Statements as of the acquisition date.
Total assets acquired were $11.2 billion, including $1.4 billion of VOBA and $0.1 billion of cash, and total liabilities assumed were $10.6 billion.
There is no goodwill, including tax deductible goodwill, associated with the acquisition.
Sale of Wealth Management Solutions Business In April 2013, the Company signed a definitive agreement to sell its wealth management solutions business to Envestnet Inc.
The transaction, which did not have a material impact to the Company’s financial results, closed in July 2013.
Due to the existence of an ongoing contractual relationship between the Company and these operations, this disposition did not qualify for discontinued operations accounting treatment under U. S.  GAAP.4.
INVESTMENTS Fixed Maturities and Equity Securities The following tables provide information relating to fixed maturities and equity securities (excluding investments classified as trading) as of the dates indicated:
## Table 2 ##
December 31, 2015
## Table 3 ##
(1) Excludes notes with amortized cost of $1,050 million (fair value, $1,039 million) which have been offset with the associated payables under a netting agreement.
(2) Includes credit-tranched securities collateralized by sub-prime mortgages, auto loans, credit cards, education loans and other asset types.
(3) Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.

<table><tr><td><i>In millions</i></td><td>2006</td><td>2005</td><td>2004</td></tr><tr><td>Industry segment operating profits</td><td>$2,074</td><td>$1,622</td><td>$1,703</td></tr><tr><td>Corporate items, net</td><td>-746</td><td>-607</td><td>-477</td></tr><tr><td>Corporate special items*</td><td>2,373</td><td>-134</td><td>-141</td></tr><tr><td>Interest expense, net</td><td>-521</td><td>-595</td><td>-712</td></tr><tr><td>Minority interest</td><td>-9</td><td>-9</td><td>-21</td></tr><tr><td>Income tax (provision) benefit</td><td>-1,889</td><td>407</td><td>-114</td></tr><tr><td>Discontinued operations</td><td>-232</td><td>416</td><td>-273</td></tr><tr><td>Net earnings (loss)</td><td>$1,050</td><td>$1,100</td><td>$-35</td></tr></table>
<table><tr><td></td><td colspan="3">As of December 31, 2015</td><td colspan="3">As of December 31, 2014</td></tr><tr><td></td><td>Notional</td><td>FairValue</td><td>HypotheticalChange inFair Value</td><td>Notional</td><td>FairValue</td><td>HypotheticalChange inFair Value</td></tr><tr><td></td><td colspan="6">(in millions)</td></tr><tr><td>Equity securities-1</td><td></td><td>$11,626</td><td>$-1,163</td><td></td><td>$12,152</td><td>$-1,215</td></tr><tr><td>Equity-based derivatives-2</td><td>$68,011</td><td>-38</td><td>1,917</td><td>$73,138</td><td>69</td><td>1,617</td></tr><tr><td>Variable annuity and other living benefit feature embedded derivatives-2(3)</td><td></td><td>-8,434</td><td>-1,355</td><td></td><td>-8,182</td><td>-1,193</td></tr><tr><td>Net estimated potential loss</td><td></td><td></td><td>$-601</td><td></td><td></td><td>$-791</td></tr></table>
<table><tr><td></td><td colspan="5">December 31, 2015</td></tr><tr><td></td><td>AmortizedCost</td><td>GrossUnrealizedGains</td><td>GrossUnrealizedLosses</td><td>FairValue</td><td>OTTIin AOCI-4</td></tr><tr><td></td><td colspan="5">(in millions)</td></tr><tr><td>Fixed maturities, available-for-sale</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>U.S. Treasury securities and obligations of U.S. government authorities and agencies</td><td>$14,992</td><td>$3,544</td><td>$19</td><td>$18,517</td><td>$0</td></tr><tr><td>Obligations of U.S. states and their political subdivisions</td><td>8,089</td><td>747</td><td>41</td><td>8,795</td><td>0</td></tr><tr><td>Foreign government bonds</td><td>71,849</td><td>12,011</td><td>147</td><td>83,713</td><td>1</td></tr><tr><td>U.S. corporate public securities</td><td>70,979</td><td>6,344</td><td>1,955</td><td>75,368</td><td>-3</td></tr><tr><td>U.S. corporate private securities-1</td><td>28,525</td><td>2,278</td><td>359</td><td>30,444</td><td>0</td></tr><tr><td>Foreign corporate public securities</td><td>26,354</td><td>2,821</td><td>621</td><td>28,554</td><td>0</td></tr><tr><td>Foreign corporate private securities</td><td>19,393</td><td>739</td><td>994</td><td>19,138</td><td>0</td></tr><tr><td>Asset-backed securities-2</td><td>10,121</td><td>226</td><td>121</td><td>10,226</td><td>-452</td></tr><tr><td>Commercial mortgage-backed securities</td><td>10,337</td><td>195</td><td>70</td><td>10,462</td><td>-1</td></tr><tr><td>Residential mortgage-backed securities-3</td><td>4,777</td><td>335</td><td>6</td><td>5,106</td><td>-4</td></tr><tr><td>Total fixed maturities, available-for-sale-1</td><td>$265,416</td><td>$29,240</td><td>$4,333</td><td>$290,323</td><td>$-459</td></tr><tr><td>Equity securities, available-for-sale</td><td>$6,847</td><td>$2,570</td><td>$143</td><td>$9,274</td><td></td></tr></table>
<table><tr><td></td><td colspan="4">December 31, 2015</td></tr><tr><td></td><td>AmortizedCost</td><td>GrossUnrealizedGains</td><td>GrossUnrealizedLosses</td><td>FairValue</td></tr><tr><td></td><td colspan="4">(in millions)</td></tr><tr><td>Fixed maturities, held-to-maturity</td><td></td><td></td><td></td><td></td></tr><tr><td>Foreign government bonds</td><td>$816</td><td>$196</td><td>$0</td><td>$1,012</td></tr><tr><td>Foreign corporate public securities</td><td>625</td><td>62</td><td>0</td><td>687</td></tr><tr><td>Foreign corporate private securities-5</td><td>78</td><td>4</td><td>0</td><td>82</td></tr><tr><td>Commercial mortgage-backed securities</td><td>33</td><td>1</td><td>0</td><td>34</td></tr><tr><td>Residential mortgage-backed securities-3</td><td>756</td><td>53</td><td>0</td><td>809</td></tr><tr><td>Total fixed maturities, held-to-maturity-5</td><td>$2,308</td><td>$316</td><td>$0</td><td>$2,624</td></tr></table>

Question: Which fair value occupies the greatest proportion in total amount (in 2015)?
Answer: 0.38567