TORONTO (Reuters)—Shares in Fairfax Financial Holdings Ltd. surged Friday as the insurance holding company swaggered out of the second quarter, boasting of good stock market picks and solid underwriting.

Fairfax stock rose 4.6% Friday morning on The Toronto Stock Exchange, a day after the company revealed its bet to go long in equities paid off in the second quarter with a $330 million investment gain.

Toronto-based Fairfax said late Thursday its net earnings surged to $275.4 million, or $15.65 a share, in the second quarter, from $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.

The big investment gain—the result of removing short and hedge positions held at the end of the year—came as Fairfax rode the rebound in global equity markets. But analysts said they were also impressed with the company's underwriting.

"The quarter was obviously very good, both from an investment standpoint and an operational standpoint," said RBC Capital Markets analyst Mark Dwelle. "I'm probably most impressed with the steady underwriting results that were delivered by all or most of the operating units."

The turnaround in underwriting, to a profit of $17.3 million in the second quarter, compares with a $65.0 million loss in the same period a year earlier.

The combined ratio of the company's insurance and reinsurance operations fell to 98.4% on a consolidated basis from 105.8% a year earlier.

"A lot of companies are losing money on their underwriting right now, so it's good that this company is making money doing what they're primarily in business to do," Mr. Dwelle said.

Chief Executive Prem Watsa told a conference call early on Friday that he was pleased with Fairfax's stock market picks in what has clearly been a buying opportunity.

"We think, five years from now, if we have chosen properly, our book value will be up significantly because of the high-quality common stock that we have purchased earlier at very attractive prices," Mr. Watsa said.

Mr. Watsa warned that Fairfax's investment portfolios will likely face a volatile future, but said he was happy with the company's unhedged position.

Mr. Watsa, a dynamic personality who has been called "Canada's Warren Buffett," said he believes the economy is in a "long and deep" recession, and warned that Fairfax's expenses will continue to rise as long as the market remained soft.

"We don't look at reducing our staff in any significant way. So our expense ratios do go up," he told analysts. "But our idea is to maintain the talent that we have so that when the cycle turns—there will be a time when it turns, we don't know when—but when it turns, we can take advantage of the cycle."