Operating costs and expenses, including commissions, were $85.5 million for 1998 compared to $77.9 million for 1997 before deferral of acquisition expenses ($81.0 million for 1996). Net of deferred acquisition costs, these costs were $44.2 million for 1998 compared to $44.6 million for 1997 ($45.0 million for 1996). The increase in expenses before deferral of acquisition expenses in 1998 is primarily attributable to higher variable expenses resulting from increased sales of variable insurance products compared to 1997. A greater portion of these expenses have been deferred in 1998 compared to 1997 as they relate to the acquisition of new business.
The Company's fixed maturity bond portfolio of $49.3 million represents 55% of investments at the end of 1998, compared to 65% at the end of 1997.
The systems used by the Company have been assessed as part of a comprehensive written plan conducted by The Manufacturers Life Insurance Company (collectively with its subsidiaries "Manufacturers Life"), to ensure that computer systems and processes of Manufacturers Life and its subsidiaries and affiliates, including the Company, will continue to perform through the end of this century and in the next. In 1996, in order to make Manufacturers Life's systems Year 2000 compliant, a program was instituted to modify or replace both Manufacturers Life's information technology systems ("IT systems") and embedded technology systems ("Non-IT systems"). The phases of this program include (i) an inventory and assessment of all systems to determine which are critical, (ii) planning and designing the required modifications and replacements, (iii) making these modifications and replacements, (iv) testing modified or replaced systems, (v) redeploying modified or replaced systems and (vi) final management review and certification. For most IT and non-IT systems identified as critical, certification has been completed for the Company. Of those systems classified as critical, management believes that over 99% were Year 2000 compliant at the end of 1998. Management continues to focus attention on the remaining 1% of critical systems. Those that affect the Company are expected to be compliant by the end of the second quarter in 1999. Management believes that the Company's non-critical systems will be Year 2000 compliant by the end of the first quarter 1999.
Separate account assets and liabilities represent funds that are separately administered, principally for variable annuity and variable life contracts, and for which the contract holder, rather than the Company, bears the investment risk Separate account assets are recorded at market value. Operations of the separate accounts are not included in the accompanying financial statements.
Income taxes have been provided for in accordance with SFAS No. 109 "Accounting for Income Taxes." The Company joins ManUSA, Manulife Reinsurance Corporation ("MRC") and Manulife Reinsurance Limited ("MRL") in filing a U.S. consolidated income tax return as a life insurance group under provisions of the Internal Revenue Code. In accordance with an income tax sharing agreement, the Company's income tax provision (or benefit) is computed as if the Company filed a separate income tax return. Tax benefits from operating losses are provided at the U.S. statutory rate plus any tax credits attributable to the Company, provided the consolidated group utilizes such benefits currently. Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their recorded amounts for financial reporting purposes. Income taxes recoverable represents amounts due from ManUSA in connection with the consolidated return.