* Canaccord downgrades stock and cuts target
* Offering follows 47 pct share run-up over past year
* Analyst doubts Sun Life, Manulife will follow suit
TORONTO, Feb 20 (Reuters) - Shares of Industrial Alliance Insurance fell more than 4 percent on Wednesday after the company announced a C$225 million ($221.73 million) share issue that spurred an analyst downgrade and diluted the company's public float by 6.5 percent.
Industrial Alliance and Financial Services Inc, Canada's No. 4 life insurer, said late on Tuesday it would issue 6 million shares at a price of C$37.50 a share, a 2.8 percent discount to its Tuesday closing price of C$38.59 on the Toronto Stock Exchange.
The company, which currently has 91 million shares outstanding, according to Reuters data, said it would use the proceeds to pay down debt.
Canaccord Genuity analyst Mario Mendonca cut his rating on the insurer to "hold," from "buy," due to the dilutive impact of the share issue, calling it "surprising and uncomfortably opportunistic" in the wake of a recent run-up in the company's shares and strong financial results.
Industrial Alliance's stock hit a 19-month high on Tuesday before the issue was announced and had risen 47 percent in the previous 12 months. The company reported a stronger-than-expected fourth-quarter profit last week, helped by improving markets.
Like fellow Canadian insurers Manulife Financial Corp and Sun Life Financial, Industrial Alliance has been rebuilding its balance sheet and hedging its market exposure following the 2008 financial crisis.
"The offering is surprising to us because with earnings and the macro picture improving noticeably, we expected the company to allow (debt levels) to decline naturally over time through growth in common equity and the maturity of debt," Mendonca said in a note.
At midday, the shares were down C$1.64 at C$36.95 on the Toronto Stock Exchange.
Mendonca also cut his 12-month price target on the stock to C$40, from C$42. He said he doesn't believe Manulife Financial and Sun Life Financial Inc will follow suit with their own equity issues.
In Manulife's case, he believes the shares are too low for the company to entertain the notion of issuing stock, while Sun Life's pending sale of its U.S. annuity business, which will further reduce the company's market exposures and give it a cash infusion, makes such a move unnecessary. ($1 = 1.0148 Canadian dollars) (Reporting By Cameron French; editing by Frank McGurty and Nick Zieminski)