UPDATE 2-Stock hedges, bonds lift Fairfax Financial profit

Thu Oct 27, 2011 5:53pm EDT

* Profit gains 150 pct on $1.6 bln investment gain

* Insurer hedged stock portfolio, bond prices higher

* CEO concerned about economic outlook for next few years

TORONTO, Oct 27 (Reuters) - Fairfax Financial Holdings said on Thursday its quarterly profit rose more than 150 percent as the insurer booked a $1.6 billion gain on investments.

The Toronto-based company, which deals in property and casualty insurance as well as investment management, earned $973.9 million, or $46.73 a share, in the second quarter ended Sept. 30.

That compared with a profit of $388.1 million, or $18.44 a share, a year earlier. The company shifted to international reporting standards in the first quarter of 2011.

Fairfax's investment gains came despite a quarter during which stock markets and bond yields plunged, as the company hedged its equity exposure last year and earned $1.3 billion on its bond portfolio as prices rose during the quarter.

"We continue to be very concerned about the economic outlook for the next few years and have maintained our equity hedges," Fairfax's founder and chief executive, Prem Watsa, said in a statement.

Watsa started the company in 1985, and has built a reputation since then as a shrewd contrarian investor by moves such as betting against the U.S. housing market in the last decade and reaping billions when the market collapsed.

He again showed his contrarian leanings earlier this year, when Fairfax took a 9 percent stake in troubled Bank of Ireland .

Underwriting results during the quarter were hit by $171.7 million in pre-tax losses primarily related to Hurricane Irene, which slammed into the U.S. east coast in August, floods in Denmark, and losses associated with the earthquake and resultant tsunami that hit Japan in March.

Net premiums written by the company's insurance and reinsurance operations during the quarter rose 21.4 percent to $1.4 billion, while operating income for insurance and reinsurance fell 70.5 percent to $39.1 million.

Fairfax's shares, which have outperformed other Canadian financials over the last four months, fell C$2.34 to C$411.66 on the Toronto Stock Exchange on Thursday. The results were released after markets closed.