* Profit tops estimates on investment gains
* Fairfax CEO Watsa maintains equity hedges
* Underwriting losses shrink despite Hurricane Sandy hit
TORONTO, Feb 14 (Reuters) - Fairfax Financial, the Canadian property and casualty insurer run by investment guru Prem Watsa, posted a stronger-than-expected fourth-quarter profit on Thursday, which included a large investment gain, after a year-earlier loss.
The Toronto-based company earned $404.1 million, or $18.90 a share, in the fourth quarter. That compared with a year-before loss of $771.5 million, or $38.47, when the company took a hedging-related charge.
Analysts had expected Fairfax Financial Holdings Ltd to post a profit of $8.90 a share, according to Thomson Reuters I/B/E/S.
The company's profit was driven by a net gain on investments of $635.6 million, which compared with investment losses of $914.9 million in the fourth quarter of 2011, when the company's equity hedges fared poorly amid strong markets.
Fairfax Chief Executive Officer Watsa hedged the company's stock portfolio in 2010, convinced that global equity markets had further to fall, and he said in a statement on Thursday the company is not altering its position.
"We are maintaining our defensive equity hedges as we remain concerned about the economic outlook," he said.
Underwriting losses during the quarter amounted to $113.1 million, a figure that was inflated by damage associated with Hurricane Sandy along the U.S. East Coast.
Still, that was an improvement from a $292.8 million underwriting loss a year earlier, when events such as the 2011 Japanese earthquake and tsunami, flooding in Thailand, U.S. tornadoes and Hurricane Irene in the United States took a big toll.
Since taking over the company in 1985, Watsa has built a reputation as a shrewd investor by moves such as betting against the U.S. housing market in the last decade and reaping huge profits when the market collapsed.
Recently, Fairfax added to its stake in Blackberry, and is now the company's largest shareholder with a 9.9 percent holding.
Shares of Fairfax fell C$2.08 to C$360.00 on the Toronto Stock Exchange on Thursday. The results were released after markets closed.