FILE PHOTO: The Sun Life Financial logo is seen at their corporate headquarters of One York Street in Toronto, Ontario, Canada, February 11, 2019. REUTERS/Chris Helgren/File Photo

By Nivedita Balu

TORONTO (Reuters) -Sun Life Financial's shares plunged as much as 8.5% on Friday, a day after the Canadian insurer said it would miss a 2025 profit target for its dental business in the U.S. due to uncertainty over Medicaid funding.

Sun Life, which bulked up its dental business through the $2.5 billion acquisition of DentaQuest in 2022, said underlying net income for the dental business, which has struggled in past quarters, is expected to be below $100 million in 2025.

The forecast revision was driven by uncertain Medicaid funding resulting in slower negotiations with states on coverage rates and higher Medicaid claims, the company said.

Sun Life works with U.S. states to administer Medicaid and Medicare Advantage dental benefits through the DentaQuest business and is dependent on government funding.

"The claims are also increasing at a faster pace, which I partially think is because people are seeing that they may lose their Medicaid benefits. So they're going to the dentist more quickly," CEO Kevin Strain said in an interview on Friday.

Strain noted that the states have been reluctant to pass on the increased claims costs, something he expects to sort itself out over the next few years.

"If we're struggling, you can imagine that the smaller players are really struggling with it ... We'll work our way through it," he said.

The U.S. remained one of the company's fastest growing and least capital-intensive regions, Strain added.

Sun Life expects over 12% underlying net income growth for Sun Life U.S. in the long term, with the dental business expected to contribute at least a third of overall earnings in the region.

The stock has lost about 8% of its value, including Thursday's losses, while peer Manulife which also reported weakness in its U.S. business, is down 6.5%.

"We believe that a reversal in the (Sun Life's) U.S. dental business that caused the company to retract its 2025 profit target for this business has implications beyond the quarter," National Bank analyst Gabriel Dechaine said.

Analysts have said Sun Life's dental business could be vulnerable to provisions in U.S. President Donald Trump's recent tax-cut and spending legislation, known as the One Big Beautiful Bill Act, which aims to cut Medicaid spending. That could weigh on the future growth of the business as tighter eligibility requirements could shrink Medicaid enrollment over time.

Underlying net income fell 4% in the U.S., which accounts for about a fifth of the company's underlying earnings.

Its underlying earnings of C$1.79 in the second quarter were above analysts’ average estimate of C$1.78 per share, according to LSEG data.

(Reporting by Nivedita Balu in Toronto and Prakhar Srivastava in Bengaluru; Editing by Nia Williams and Joe Bavier)