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Buffett Watch: Outlook Negative

Updated from 2:36 p.m. EDT

Berkshire Hathaway (BRK.A - Get Report) is in danger of losing its triple-A rating with Standard & Poor's if its capital levels or the value of its equity holdings continue to dwindle.

S&P late Tuesday revised its rating outlook for Berkshire, the Omaha, Neb., insurance and investing firm headed by billionaire investor Warren Buffett, to negative from stable. If the outlook for Berkshire continues to worsen over the next year, S&P could cut the insurer's rating.

"The decline in equity values in 2009 has reduced the statutory capital of the insurance operations, and a preliminary analysis of the group's capital adequacy indicates that the group's capital is no longer redundant at the 'AAA' level," said S&P credit analyst John Iten in a research report.

In December, S&P said it would consider downgrading Berkshire's outlook to negative if capital markets continued to weaken, investment-related losses reduced capital below the triple-A level, and the firm was not able to rebuild capital back up to that level within a reasonable time frame.

S&P said the time horizon for the outlook is 12 months. If, during that period, a continued downturn in equity values hurts its capital further, or if it appears that the insurance business won't be able to restore its capital back to the triple-A level, then the agency will lower its rating.

However, S&P said a downgrade of the insurance company's ratings would likely be a one-level drop. Still, a downgrade by S&P would the be the second for Berkshire this year, after Fitch Ratings reduced the insurer's issuer default rating to double-A-plus from triple-A and its senior unsecured debt rating to double-A from triple-A.

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