Mortgage insurers could see rockier times ahead if the economy falters, leading to more delinquencies within their portfolios,  Standard & Poor's said this week. In an article titled "As The U.S. Economy Recovers, Mortgage Insurers are Having a Tougher Time Bouncing Back," S&P said it does not expect mortgage insurers to become profitable until at least 2012. For now, S&P is maintaining a negative outlook on the mortgage insurance sector. And while a return to profitability is feasible for insurers within the next two years, it's contingent on the overall U.S. economy and unemployment figures, S&P said. "Our expectation that mortgage insurers could report operating profits in 2012 — some in late 2011 at the earliest — hinges on the idea that the fragile U.S. economy and housing markets won't suffer significant setbacks," said Standard & Poor's credit analyst Ron Joas. "If unemployment were to increase, new notices of delinquencies could rise once again, and mortgage insurers would likely continue to lose money through 2012." S&P expects to have a better understanding of what's happening within specific mortgage insurance firms later this year. In its most recent earnings report, insurer PMI Group (PMI) narrowed its fourth-quarter loss as new loan insurance activity more than doubled and the number of loans in default fell slightly. The Walnut Creek, Calif-based company reported a fourth-quarter loss of $184.4 million, or $1.14 per share. A year earlier, PMI Group reported a loss of $228.2 million, or $2.76 per share, for the fourth quarter. The nation's largest private mortgage insurer, MGIC Investment Corporation (MTG) also narrowed its fourth-quarter loss to $186.7 million, or 93 cents a share, from $280.1 million, or $2.25 a share, in 2009. "We will continue to have a negative outlook on the sector until we gain confidence that recent positive trends will persist, signs of greater stability become more evident, and greater clarity is seen around operating results and the industry's legal and regulatory environment," S&P concluded. While regulators have until April to reach a consensus on the definition of a qualified residential mortgage, The Wall Street Journal is reporting mortgage insurers may benefit from a possible exemption for loans sold to Fannie Mae and Freddie Mac. Write to Kerri Panchuk.