* Q2 diluted EPS $15.56 vs EPS $0.84
* Consolidated combined ratio 98.4 pct vs 105.8 pct
* Equity position pays off, but CEO warns of volatility (Adds details; in U.S. dollars unless noted)
By Andrea Hopkins
TORONTO, July 30 (Reuters) - The decision by Fairfax Financial Holdings Ltd (FFH.TO) to go long in equities paid off in a big way in the second quarter, as the insurance holding company reported a solid gain in profit, but warned that future quarters may be bumpy.
Toronto-based Fairfax said net earnings surged to $275.4 million, or $15.65 a share, in the second quarter, ended June 30, compared with $27.6 million, or $0.84 per share, in the same quarter a year earlier.
Analysts had expected earnings per share of $6.06, according to Reuters Estimates.
Fairfax reported a $330 million investment gain, the result of removing short and hedge positions held at the end of the year, as it rode the rebound in global equity markets.
Chief Executive Prem Watsa said he was pleased with the results but warned future earnings may be volatile.
"Our continuing focus on high quality common stocks reflects our view that these should provide excellent returns over the long term, though the volatility of the equity markets may result in lumpy quarterly or annual results," Watsa said in a statement.
Fairfax also saw a turnaround in underwriting for its insurance and reinsurance operations after a loss in the same period a year earlier. The combined ratio of the company's insurance and reinsurance operations fell to 98.4 percent on a consolidated basis from 105.8 percent a year earlier.
Underwriting profit improved to $17.3 million, compared with an underwriting loss of $65.0 million in the second quarter of 2008.
The company also notched gains in interest and dividend income. Income rose 12 percent to $184.5 million from $164.7 million.
The second-quarter profit and the increased market value of Fairfax's bond and common stock investments drove the company's book value to $315.91 per basic share at quarter's end, from $254.95 three months earlier, Fairfax said.
Revenues rose 40 percent to $1.7 billion while net premiums written fell 4.8 percent to $1.1 billion, Fairfax said.
Shares of Fairfax, which has insurance operations in Canada, the United States and Asia, closed up 1.8 percent at C$315.50 on the Toronto Stock Exchange on Thursday.
$1=$1.08 Canadian Reporting by Andrea Hopkins; editing by Rob Wilson