as of December 31, 2000. The amount ceded under the treaty was based on the calculated leverage ratio at the end of each calendar quarter. The total expense recognized under the treaty included in other operating expenses was $2,650,000 in 1999. Beginning in 2000, this treaty was accounted for under SOP 98-7 and therefore, $1,600,000 was included in incurred losses during 2000, relating to the excess loss protection treaty. As described in note 1, the Company establishes reserves to provide for the estimated costs of settling claims in respect of loans reported to be in default and loans that are in default that have not yet been reported to the Company. The default and claim cycle on mortgage loans that the Company covers begins with a receipt from the lender of notification of a default on an insured loan. The master policy with each lender requires the lender to inform the Company of an uncured default on a mortgage loan within 75 days of the default. The incidence of default is influenced by a number of factors, including change in borrower income, unemployment, divorce and illness, the level of interest rates, and general borrower creditworthiness. Defaults that are not cured result in claims to the Company. Borrowers may cure defaults by making all delinquent loan payments or by selling the property and satisfying all amounts due under the mortgage. Different regions of the country experience different default rates due to varying economic conditions and each state has different rules regarding the foreclosure process. These rules can impact the amount of time it takes for a default to reach foreclosure, so the Company has developed a reserving methodology that takes these different time periods into account in calculating the reserve. When a specific loan initially defaults, it is uncertain  the default will result in a claim. It is the Company’s experience that a significant percentage of mortgage loans in default end up being cured. Increasing the reserve in stages as the 4. LOSSES AND LOSS ADJUSTMENT EXPENSES foreclosure progresses approximates the estimated total loss for that particular claim. At any time during the foreclosure process, until the lender takes title to the property, the borrower may cure the default. Therefore, it is appropriate to increase  the reserve in stages as new insight and information is obtained.  At the time of title transfer, the Company has approximately 100% of the estimated total loss reserved. In the financial guaranty business, policies are monitored by the Company or the primary insurers over the life of the policy. When the policy’s performance deteriorates below underwriting expectations, it is placed on the Watch List. Once a transaction is placed on the Watch List, the surveillance of the transaction is actively monitored, which may include communication with the borrower, site inspection or the engagement of a third party consultant. If the transaction continues to deteriorate until a default is probable, the Company will establish a loss reserve. Specific loss and loss expense reserves are recommended by the risk management function to a committee for approval. The following tables present information relating to the liability for unpaid claims and related expenses (in thousands): As a result of changes in estimates of insured events in prior years, the provision for losses and loss adjustment expenses (net of reinsurance losses of $1,577,000 in 2001 and recoveries of $1,042,000, and $28,231,000 in 2000 and 1999, respectively) in the mortgage insurance business decreased by $141,013,000, $93,433,000 and $43,996,000 in 2001, 2000 and 1999, respectively, due primarily to lower than anticipated claim payments as compared to the amounts reserved as a result of strong housing prices. During 2001, the Company incurred losses and LAE of $11,430,000 in the financial guaranty insurance business related to prior years. This adverse development is primarily related to trade credit business and is the result of obtaining additional information on the assumed reinsurance as well  as higher than expected development on specific claims. > 29 Mortgage Insurance  2001 2000 1999  Balance at January 1 $ 390,021 $335,584 $245,125  Add losses and LAE incurred in respect of default notices received in: Current year 320,159 247,759 218,139  Prior years (141,013) (93,433) (43,996)  Total incurred 179,146 154,326 174,143  Deduct losses and  LAEpaid in respect of default notices received in: Current year 21,237 8,891 7,353  Prior years 82,486 90,998 76,331  Total paid 103,723 99,889 83,684  Balance at December 31 $ 465,444 $390,021 $335,584 Financial Guaranty 2001 Balance at February 28 (date of acquisition) $110,433 Less Reinsurance recoverables 185  Balance at February 28, net 110,248  Add losses and LAEincurred related to:  Current year 17,560  Prior years 11,430  Total incurred 28,990  Deduct losses and LAEpaid related to:  Current year 3,815  Prior years 12,437  Total paid  16,252  Balance at December 31, net 122,986 Add Reinsurance recoverables 213  Balance at December 31 $123,199