TORONTO – Insurance and investment giant Fairfax Financial Holdings Ltd. says second-quarter profit rose 14%, largely due to improved underwriting results and a jump in revenues from premiums written by its insurance and reinsurance businesses.The Toronto-based financial services company, which reports in U.S. dollars, said Thursday it earned US$95-million, or US$3.85 per diluted share, up 14% from the US$83.3-million, or US$3.40 per diluted share during the year-ago quarter.The underwriting business at the casualty and property insurer swung back to profit — US$34.8-million — from a loss of US$6.1-million during the quarter a year-ago, when it booked losses related to an influx of tornadoes in the U.S.Net insurance premiums written increased by 14% to US$1.6-billion from US$1.37-billion in the 2011 quarter.However, the improved results from its underwriting and premiums were offset by lower investment gains and lower interest and dividend income during the volatile quarter.[np-related]“Our underwriting results continued to improve on increased premiums and we produced a small investment gain notwithstanding unrealized investment losses related to our defensive hedging strategy,” said Prem Watsa, chairman and CEO of Fairfax.“We continue to maintain our equity hedges as we remain very concerned about the economic outlook over the next few years.”Companies buy hedges — contracts that protect the future value of investments and other assets — during volatile stock markets. However, unexpected share price swings can lead to paper losses on the balance sheet, which must be accounted for.Operating income in the insurance and reinsurance businesses fell to US$117.3-million from US$146.2-million in the quarter of 2011, largely due to the decrease in interest and dividend income.Interest and dividend income slipped to US$104.9-million from US$195.1-million as the company increased its holdings in low-yielding cash and short-term investments.The company saw lower gains from investments, coming in at US$71.5-million during the quarter, compared to a gain of US$119.6-million in the 2011 quarter.It also booked a US$7.2-million loss from its equity hedging strategy, which compared to a US$396.6-million gain in the year-earlier quarter. That was largely offset by a US$40.9-million gain on equity investments this quarter, compared to a US$624.8-million loss during the quarter of 2011.The company decided to hedge its exposure to equity investments in response to significantly higher stock valuations and economic uncertainty and equity hedges represented 104.2% of its equity and related holdings as of June 30.“The market value and the liquidity of these hedges are volatile and may vary dramatically either up or down in short periods, and their ultimate value will therefore only be known over the long term,” Fairfax said in its earnings release.During the quarter, the insurance and investment giant announced plans to buy a 77% interest in travel business Thomas Cook (India) Ltd. for about US$150-million.And it also revealed it would acquire Brit Insurance Ltd. of London from Brit Group for about US$300-million.The company also recently doubled its stake in Research In Motion after the company announced a new chief executive and revamped board of directors. Watsa also took a seat on its board.Earlier this month, Watsa increased his own holdings in the struggling BlackBerry maker to 9.9% — representing 51.9 million shares — a filing with the U.S. Securities and Exchange Commission showed.Fairfax, through its subsidiaries, is involved in property and casualty insurance and reinsurance and investment management.Shares in the company, which reported results after markets, rose $3.43 to close at $380 each on the Toronto Stock Exchange.