Industrial Alliance Insurance and Financial Services Inc. today reported a 12% increase in fourth-quarter earnings and raised its dividend.

But the life and health insurer also warned that the market downturn that kicked off 2008 could crimp this year’s profit.

Industrial Alliance said it earned $63.1 million ($63 million), or 78¢ a share, in the three months ended Dec. 31, 2007. That compares with $56.4 million, or 70¢ a share, a year earlier.

It said insurance premiums and mutual fund deposits rose 10% to $1.3 billion in the fourth quarter, led by record mutual fund sales.

“The year ended on a strong note,” Yvon Charest, the company’s president and CEO, said in a news release.

“We have once again obtained low double-digit growth in income, which is in line with our expectations, and we efficiently managed profit margins and sales in the individual insurance sector.”

The Quebec City-based company also raised its quarterly dividend to 22.5¢ a share from 20¢.

Looking ahead, Industrial Alliance said that “under normal circumstances” it would expect earnings per share to rise by 10% to 13% annually. But the stock market downturn early this year could hurt net income, it said.

“The company estimates that a sudden 10% drop in the stock markets at the beginning of the year, followed by stock market growth according to forecasts for the year, would lead to a $18.6 million (23¢ per common share) decrease in the net income available to common shareholders,” it said.

Industrial Alliance’s return on equity in the fourth quarter was 15.2% on an annualized basis, down from 15.4% in the same 2006 period.

Its assets under management and under administration were $50.4 billion as of Dec. 31, down slightly from the end of the third quarter, but up 7% from yearend 2006.

Last quarter, the company wrote down by 15% the value of the $104 million in nonbank-sponsored asset-backed commercial paper to which it is exposed. It said on Wednesday it believed that markdown is still adequate.