* Equity market hedges hurt profit
* Underwriting results strong
* Year-before results included $1.6 bln gain
TORONTO, Oct 25 (Reuters) - Fairfax Financial, the Canadian property and casualty insurer run by contrarian investor Prem Watsa, said on Thursday its third-quarter profit fell sharply from the year before, due to losses on the company's equity' hedges.
The Toronto-based company earned $34.6 million, or 90 cents a share, in the third-quarter, down from $973.9 million, or $46.73 a share, a year earlier.
The year-before result included a $1.6 billion gain on investments, as Fairfax's hedges on its equity portfolio allowed it to benefit from a weak quarter for markets.
Strong stock market gains in the most recent quarter - the S&P/TSX composite index rose 6 percent during the quarter, versus a 12.6 decline a year earlier - produced a $23.6 million net investment loss.
Fairfax CEO Watsa hedged the company's stock portfolio in 2010, convinced that global equity markets had further to fall.
Underwriting profit was $73.7 million, compared with an underwriting loss of $105.3 million a year earlier.
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 billions when the market collapsed.
Recently, Fairfax has built a substantial position in Research In Motion, and Watsa took a position on the BlackBerry maker's board in January. As of this week, Fairfax owns 9.9 percent of the RIM, making it the company's largest shareholder.
Fairfax shares, which are down 15 percent so far this year, closed at C$369.77 on the Toronto Stock Exchange on Thursday before the results were released.