@v587d/capital-generation 2.6.4 → 2.7.0

package/selected-skills/investment-skills/skills/buffett-investment-framework/references/08-specialized-overlays.md

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+# Specialized Industry and Instrument Overlays
+
+Use these cards as evidence-bounded analytical prompts derived from Buffett and
+Berkshire writings. Apply them to supplied evidence, preserve each card’s limits, and
+return unresolved findings when prerequisites are missing.
+
+Read this file when adding a triggered insurance, banking, consumer, infrastructure,
+technology, commodity, or instrument check.
+Load only the cards selected by the router; do not load the whole module by default.
+Abbreviated corroboration citations resolve in the [source key](00-source-key.md).
+
+## Card Index
+
+| Card | Decision question |
+| --- | --- |
+| [S01](#s01) | Does float create durable financing value or conceal expensive, unstable underwriting? |
+| [S02](#s02) | Are risks identifiable and priced for full expected cost, and will management shrink when terms are inadequate? |
+| [S03](#s03) | How much reported underwriting profit survives accident-year, reserve-development, incentive, and cycle scrutiny? |
+| [S04](#s04) | Can one event or common cause impair solvency, liquidity, claims payment, or post-shock capacity? |
+| [S05](#s05) | Can claims, collateral, refinancing, or counterparties force cash shortfalls when the same shock weakens the chain? |
+| [S06](#s06) | What prevents this apparently commodity-like insurer from earning commodity returns? |
+| [S07](#s07) | Can modest asset or underwriting errors overwhelm thin equity or trigger confidence-sensitive funding loss? |
+| [S08](#s08) | Do loyalty, pricing, distribution, inventory, and format cause durable returns, or does the brand depend on a weakening channel? |
+| [S09](#s09) | Do essential demand and network position earn adequate owner returns after obligations, regulation, maintenance, and financing stress? |
+| [S10](#s10) | Can important economics be forecast despite obsolescence, distribution change, network effects, and shifting attention? |
+| [S11](#s11) | Do normalized owner returns arise from durable advantage or favorable price, cycle, or underinvestment? |
+| [S12](#s12) | Are event, duration, cash-flow, downside, and optionality mechanics understandable and adequately evidenced? |
+
+## Complete Cards
+
+<a id="s01"></a>
+
+### S01 — Insurance: Value Float by Amount, Cost, Duration, and Outlook
+
+- **Decision question:** Does float create durable financing value or conceal expensive,
+  unstable underwriting?
+- **Guidance:** Analyze amount, normalized underwriting cost, claim-payment duration,
+  runoff, and outlook; compare full cost with realistic funding.
+- **Use when:** Material property-casualty operations or investable funds received
+  before uncertain claims are paid.
+- **Analytical actions:** Reconcile float; estimate cycle-normalized cost and duration;
+  stress runoff, reserve deterioration, yield, and cash use.
+- **Output:** A float ledger and scenario table with funding comparison, required
+  capital, and unresolved reserve effects.
+- **Limits:** Float remains a liability and long duration adds reserve uncertainty; an
+  equity analogy requires supported low cost and durability.
+- **Source basis:**
+  - **Berkshire Hathaway 1986 annual letter** — *defines*: float.
+  - **Berkshire Hathaway 2001 annual letter** — *qualifies*: float value depends on
+    relative funding cost.
+- **Corroboration:** OM1996; BH2002; BH2014; LOW ch.7 (early float recognition).
+
+<a id="s02"></a>
+
+### S02 — Insurance: Underwrite Exposure and Price Rather than Volume
+
+- **Decision question:** Are risks identifiable and priced for full expected cost, and
+  will management shrink when terms are inadequate?
+- **Guidance:** Evaluate exposure, conservative severity, full-cost pricing, and
+  demonstrated willingness to reject uneconomic volume.
+- **Use when:** Insurance underwriting where premium growth may obscure risk selection
+  and expected loss.
+- **Analytical actions:** Define exposure, limits, and aggregation; compare price with
+  loss, expense, capital, and uncertainty; review cohort and volume decisions.
+- **Output:** An underwriting-discipline scorecard with exposure, price adequacy,
+  expected economics, volume decisions, and unresolved models.
+- **Limits:** Shrinking is not always correct and no model removes uncertainty; missing
+  exposure or loss assumptions block a conclusion.
+- **Source basis:**
+  - **Berkshire Hathaway 1977 annual letter** — *implements*: accept lower volume when
+    insurance rates are inadequate.
+  - **Berkshire Hathaway 2010 annual letter** — *implements*: apply four disciplines to
+    insurance underwriting.
+- **Corroboration:** BH2014; BH2023; BH2025; LOW ch.7 (pricing-over-volume origin).
+
+<a id="s03"></a>
+
+### S03 — Insurance: Reconstruct Reserves and Earnings Through the Cycle
+
+- **Decision question:** How much reported underwriting profit survives accident-year,
+  reserve-development, incentive, and cycle scrutiny?
+- **Guidance:** Treat earnings as provisional until accident-year development,
+  prior-year revisions, settlement maturity, cycles, and quiet years are reconciled.
+- **Use when:** Material loss reserves, long-tail claims, catastrophe exposure, changing
+  assumptions, or unusually smooth results.
+- **Analytical actions:** Build accident- and calendar-year bridges; separate current
+  underwriting from reserve changes; normalize cycles.
+- **Output:** A reserve-development and normalization table with uncertainty ranges,
+  revisions, and unresolved accident years.
+- **Limits:** Reserve error may be innocent and even multiyear windows miss rare losses;
+  absent triangles leave earnings unresolved.
+- **Source basis:**
+  - **Berkshire Hathaway 1984 annual letter** — *supports*: property casualty statements
+    are provisional.
+  - **Berkshire Hathaway 1993 annual letter** — *qualifies*: loss free years do not
+    establish catastrophe profitability.
+- **Corroboration:** BH2002; BH2023; LOW ch.10 (GEICO reserving crisis).
+
+<a id="s04"></a>
+
+### S04 — Insurance: Test Aggregate Tail Loss Against Distress Capacity
+
+- **Decision question:** Can one event or common cause impair solvency, liquidity,
+  claims payment, or post-shock capacity?
+- **Guidance:** Aggregate policies, businesses, investments, counterparties, collateral,
+  and funding; work backward from intolerable outcomes.
+- **Use when:** Catastrophe, systemic, liability, cyber, terrorism, or other nonlinear,
+  correlated exposure.
+- **Analytical actions:** Enumerate common causes; estimate ranges under model breaks;
+  compare loss with regulatory, covenant, claims, and post-shock needs.
+- **Output:** An aggregate-tail ledger with loss ranges, liquidity timing, binding
+  capacity, and unresolved correlations.
+- **Limits:** Scenarios are never exhaustive and no universal buffer applies; preserve
+  false precision as unresolved.
+- **Source basis:**
+  - **Berkshire Hathaway 1996 annual letter** — *implements*: reverse engineer
+    aggregated tail risk from intolerable outcomes.
+  - **Berkshire Hathaway 2012 annual letter** — *qualifies*: insurance capacity must
+    remain proportionate to enterprise resources.
+- **Corroboration:** BH2002; BH2014; LOW ch.23 (super-cat exposure growth).
+
+<a id="s05"></a>
+
+### S05 — Insurance: Test Crisis Liquidity and the Risk-Transfer Chain
+
+- **Decision question:** Can claims, collateral, refinancing, or counterparties force
+  cash shortfalls when the same shock weakens the chain?
+- **Guidance:** Analyze claims liquidity and the complete transfer chain together,
+  including ability, duration, collateral, jurisdiction, and weakest link.
+- **Use when:** Losses are ceded, collateralized, long-tailed, externally financed, or
+  dependent on multiple transfer parties.
+- **Analytical actions:** Map gross loss, ceded layers, collateral, timing, and parties;
+  stress simultaneous claims and failures; identify unrefinanced liquidity.
+- **Output:** A risk-transfer and liquidity map showing gross and net timing,
+  dependencies, collateral, and unresolved recoverability.
+- **Limits:** Retention is not automatically safer and legal rights do not ensure prompt
+  collection; unverified recoveries stay unavailable.
+- **Source basis:**
+  - **Berkshire Hathaway 2001 annual letter** — *implements*: stress test entire
+    reinsurance counterparty chain.
+  - **Berkshire Hathaway 2004 annual letter** — *supports*: reinsurer solvency is
+    material counterparty risk.
+- **Corroboration:** BH2002; BH2014.
+
+<a id="s06"></a>
+
+### S06 — Insurance: Require Discipline and Structure for a Moat
+
+- **Decision question:** What prevents this apparently commodity-like insurer from
+  earning commodity returns?
+- **Guidance:** Look for low cost or niche, distribution, underwriting skill, capital,
+  and a culture willing to sacrifice volume; do not infer a moat from growth.
+- **Use when:** An insurer is claimed to have durable competitive advantage.
+- **Analytical actions:** Name and compare the mechanism; test price, retention,
+  acquisition cost, losses, distribution, and capital through a cycle; seek persistence.
+- **Output:** An insurance-moat map with competitor evidence, cycle indicators, erosion
+  signals, and unresolved causal links.
+- **Limits:** Berkshire and GEICO are favorable cases, not base rates; unobserved causal
+  outcomes leave the moat unresolved.
+- **Source basis:**
+  - **Berkshire Hathaway 1987 annual letter** — *supports*: commodity insurance rewards
+    low cost or niche.
+  - **Berkshire Hathaway 1999 annual letter** — *qualifies*: reinsurance advantage
+    combines distribution skill culture and capital.
+- **Corroboration:** BH2014; BH2023; LOW ch.10 (GEICO expense-ratio edge).
+
+<a id="s07"></a>
+
+### S07 — Banking: Assess Funding, Credit, Leverage, and Culture
+
+- **Decision question:** Can modest asset or underwriting errors overwhelm thin equity
+  or trigger confidence-sensitive funding loss?
+- **Guidance:** Analyze asset quality, vintages, funding, liquidity, leverage,
+  incentives, and bad-news flow as one bank-specific fragility system.
+- **Use when:** Banks, deposit-taking lenders, or businesses dependent on
+  confidence-sensitive funding.
+- **Analytical actions:** Segment credit and concentration; stress funding loss, credit,
+  and liquidity together; compare incentives and reporting with outcomes.
+- **Output:** A banking resilience matrix covering loss, runoff, liquidity, capital,
+  culture indicators, and unresolved disclosures.
+- **Limits:** Regimes and protections differ materially; missing asset or funding detail
+  blocks the branch.
+- **Source basis:**
+  - **Berkshire Hathaway 2006 annual letter** — *illustrates*: teaser mortgages defer
+    and amplify payment stress.
+  - **Berkshire Hathaway 2010 annual letter** — *supports*: leverage can destroy
+    survival when refinancing disappears.
+- **Corroboration:** EWB §II.G; OM1996; BH2002; LOW ch.19 (deposit-insurance moral
+  hazard).
+
+<a id="s08"></a>
+
+### S08 — Consumer and Retail: Separate Brand Economics from Fragile Distribution
+
+- **Decision question:** Do loyalty, pricing, distribution, inventory, and format cause
+  durable returns, or does the brand depend on a weakening channel?
+- **Guidance:** Test customer behavior and price separately from distribution access,
+  delivered value, inventory risk, and format durability.
+- **Use when:** Consumer products, retail, restaurants, or similar brand and channel
+  dependence.
+- **Analytical actions:** Measure price, volume, retention, mix, and channel economics;
+  trace inventory and format risks; identify channel shifts and alternatives.
+- **Output:** A franchise and distribution scorecard with behavior, unit economics,
+  dependencies, and erosion indicators.
+- **Limits:** Exceptional management can overcome some weak economics; missing cohort,
+  channel, or inventory evidence leaves durability unresolved.
+- **Source basis:**
+  - **Berkshire Hathaway 1983 annual letter** — *supports*: consumer franchise and low
+    cost position create goodwill.
+  - **Berkshire Hathaway 1988 annual letter** — *qualifies*: exceptional management can
+    overcome mediocre industry economics.
+- **Corroboration:** EWB §II.E; EWB §V.C; LOW ch.18 (Coca-Cola franchise case).
+
+<a id="s09"></a>
+
+### S09 — Infrastructure: Evaluate Regulation, Irreplaceability, and Maintenance Capital
+
+- **Decision question:** Do essential demand and network position earn adequate owner
+  returns after obligations, regulation, maintenance, and financing stress?
+- **Guidance:** Evaluate regulated return, irreplaceability, service duties, required
+  capital, political legitimacy, and stressed financing together.
+- **Use when:** Utilities, railways, pipelines, networks, and regulated or essential
+  capital-intensive infrastructure.
+- **Analytical actions:** Reconcile allowed and realized returns; separate maintenance,
+  replacement, and expansion; stress lag, affordability, utilization, and debt service.
+- **Output:** An infrastructure bridge covering rate mechanism, capital, returns,
+  financing, constraints, and unresolved regulation.
+- **Limits:** Irreplaceability does not guarantee owner returns; missing rate or
+  maintenance evidence blocks the judgment.
+- **Source basis:**
+  - **Berkshire Hathaway 2015 annual letter** — *implements*: regulated investment
+    requires reasonable returns and constituency approval.
+  - **Berkshire Hathaway 2003 annual letter** — *qualifies*: stable ring fenced utility
+    cash flows can support subsidiary debt.
+- **Corroboration:** OM1996; BH2014.
+
+<a id="s10"></a>
+
+### S10 — Technology and Media: Test Whether Disruption Strengthens or Destroys the Moat
+
+- **Decision question:** Can important economics be forecast despite obsolescence,
+  distribution change, network effects, and shifting attention?
+- **Guidance:** Identify the protection mechanism, then test technical substitution,
+  platform control, distribution, behavior, and reinvestment; stop if forecastability
+  cannot be bounded.
+- **Use when:** Technology, software, platforms, media, advertising, or rapid technical
+  and distribution change.
+- **Analytical actions:** Map mechanism and dependencies; track retention, switching,
+  network density, distribution, attention, and innovation spend; define exit
+  indicators.
+- **Output:** A disruption and forecastability map with dependencies, erosion
+  indicators, and an estimable or outside-boundary result.
+- **Limits:** Leadership, reputation, or network size alone is insufficient; unbounded
+  critical economics stop the branch.
+- **Source basis:**
+  - **Berkshire Hathaway 1993 annual letter** — *qualifies*: stay with easy to
+    understand businesses.
+  - **Berkshire Hathaway 2005 annual letter** — *defines*: widening the moat.
+- **Corroboration:** EWB §II.E; BH2014; LOW ch.18 (competence-bounded selection).
+
+<a id="s11"></a>
+
+### S11 — Energy and Commodities: Normalize Cycles, Inflation, and Capital Intensity
+
+- **Decision question:** Do normalized owner returns arise from durable advantage or
+  favorable price, cycle, or underinvestment?
+- **Guidance:** Separate price exposure from controllable advantage and normalize
+  volume, price, utilization, depletion, capital, regulation, and financing.
+- **Use when:** Producers, processors, commodity-linked assets, or energy businesses.
+- **Analytical actions:** Build price-volume-cost and cycle bridges; estimate
+  maintenance, depletion, and working capital; test cost claims under adverse prices and
+  capacity.
+- **Output:** A normalized commodity table with cycle range, capital burden, cost
+  position, inflation exposure, and unresolved assumptions.
+- **Limits:** Low-cost producers may be exceptions and price forecasts remain uncertain;
+  missing reserves or replacement data blocks owner cash.
+- **Source basis:**
+  - **Berkshire Hathaway 1978 annual letter** — *supports*: commodity capital intensity
+    depresses returns.
+  - **Berkshire Hathaway 1985 annual letter** — *qualifies*: commodity cost saving capex
+    becomes industry price reduction.
+- **Corroboration:** EWB §I.C; EWB §V.C; OM1996; BH2014.
+
+<a id="s12"></a>
+
+### S12 — Special Instruments: Analyze Event Probability, Duration, Downside, and Optionality
+
+- **Decision question:** Are event, duration, cash-flow, downside, and optionality
+  mechanics understandable and adequately evidenced?
+- **Guidance:** Route each instrument to atomic contractual cash-flow,
+  event-probability, duration, upside, failure-downside, and enforceability analysis;
+  frozen evidence supports only announced-event arbitrage.
+- **Use when:** Announced-event arbitrage, workout, preferred, convertible, or unusual
+  contractual claim rather than ordinary equity.
+- **Analytical actions:** Identify contract, event, states, and legal dependencies;
+  estimate probability, duration, terms, and failure loss; stop unsupported branches.
+- **Output:** A state-contingent worksheet with event states, probability inputs,
+  duration, payoff and loss ranges, legal dependencies, and unsupported branches.
+- **Limits:** No universal return, probability, diversification, or legal checklist
+  applies; unsupported instruments remain unresolved.
+- **Source basis:**
+  - **Berkshire Hathaway 1988 annual letter** — *defines*: risk arbitrage.
+  - **Berkshire Hathaway 1988 annual letter** — *implements*: four question arbitrage
+    analysis.
+- **Corroboration:** EWB §II.B; BPL1964.
+
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