Unum Corp., the nation's largest underwriter of disability insurance, is entering 1999 with a healthy glow.

It rules one of the few fast-growing segments of the insurance business: group disability coverage.

In 1997, according to A.M. Best Co., Unum wrote 25% of the $6 billion in premiums on policies to protect workers against loss of income from accidents or illnesses. Premiums and earnings are rising briskly, and new business accounts for 40% to 50% of Unum's policies annually, said chief executive officer James F. Orr 3d.

And bigger things lie ahead. On Nov. 23, Unum announced plans to merge with Provident Cos., the leader in the smaller but blossoming business of insuring individuals against disability. Provident, Chattanooga, Tenn., underwrote 41% of what A.M. Best calculates was a $3.2 billion market in 1997. The deal is expected to close at midyear.

The merged company, Unum-Provident would command one-third of the U.S. market for disability policies. "They really do become a powerhouse regarding disability," said Valerie Jordan, principal of Jordan & Jordan, a Belchertown, Mass., consulting firm.

Atop this powerhouse would be Mr. Orr. As chairman and CEO of UnumProvident, he said, he expects to build sales and market share further by tapping the middle-income market, which he says has been largely neglected.

Expanding distribution will be a key, and that means adding sales agreements with bank-affiliated insurance agencies, credit card companies, and affinity groups, Mr. Orr said during an interview in a Unum boardroom overlooking Portland's Old Port.

Even before the Provident deal was announced, Unum-which currently gets 80% of its sales volume from 4,000 captive agents-was moving ahead with such plans, Mr. Orr said. It launched a "diversified marketing operations" group in October to focus on sales through unaffiliated agencies.

Banks are interested in what Unum and its competitors have to offer. Disability and long-term care "are certainly the buzzwords right now," said David de Gorter, president of First Union Corp.'s insurance group. "Our plans call for an increase in disability products."

One reason for the interest: Most types of insurance policies are so well established that the only way for agents and underwriters to reel in much new business is to swipe it from a competitor. But disability insurance is different, Mr. Orr said. For instance, only four of 10 American workers eligible for group policies are thought to be covered today.

"It's an under-penetrated market that's growing very rapidly," Mr. Orr said. "We need to broaden the channels of distribution to get into the middle market."

Observers said Mr. Orr, Unum's CEO since 1987, is the right person to lead the company forward. James L. Moody Jr., a member of the board of directors, praises him for maintaining a laser-like focus on Unum's core strengths as a disability insurer.

He said Mr. Orr proved his mettle in 1994 when Unum reported its first- and so far, only-quarterly loss since converting from mutual ownership to a stock company in 1986.

Unum had a great many disability claims from a product it sold to doctors. Mr. Orr responded by quickly jettisoning some health care insurance and government insurance contract businesses, Mr. Moody said.

"The management, led by Jim Orr, focused on trying to peel off some business that wasn't going to be that successful and focused on areas where they had expertise," Mr. Moody said.

Mr. Moody is also pleased that the Provident agreement brings with it a successor for Mr. Orr. The deal calls for Mr. Orr, 55, to run the company until July 1, 2001, when Provident CEO J. Harold Chandler is to take over the CEO post.

The planned merger would create what Unum calls the global leader in disability insurance and complementary special risk products, like cancer and business travel accident coverage. UnumProvident would have pro forma revenues of more than $8.4 billion for the 12 months that ended Sept. 30 and market capitalization of more than $11 billion.

Valued at about $5 billion, the deal calls for Unum shareholders to get one share of stock in the post-merger company for each share they now hold and Provident shareholders, 0.73 share. The two headquarters will be retained. The company expects savings of $120 million to $130 million annually through consolidation.

Analysts have praised the deal, saying it brings together complementary organizations. Not only business lines but also the companies' philosophies mesh, said Gloria L. Vogel, an independent analyst in New York who called it "a wonderful merger."

Ms. Vogel, formerly of Advest, said both companies have been leaders in developing programs to help workers return to work sooner. These programs are good for employees and their companies and reduce the time disability payments must be made, she said.

Still, Mr. Orr, who spent 10 years at the former Connecticut Bank and Trust, rising to executive vice president and treasurer, said that expanding sales won't be a snap. For one thing, disability insurance isn't well understood by the public.

To build awareness of their products, both Unum and Provident have deployed advertising campaigns aimed at the general public, which a Unum spokeswoman said is likely to continue.

Provident's campaign cost $10 million for four months last year, said James Johnson, a Provident spokesman. He said the goal was to dispel the common belief that disability is a permanent condition. "We're not talking a lifetime," he said, "and we need to get people to look at disability in a different way."

Evolving distribution methods also require a new vision, Mr. Orr said. Firms like discount brokerage Charles Schwab & Co. are redefining distribution as they move into electronic sales, he said.

In Unum's quest for new sales outlets, it is "a danger to think about banks as banks and to think about insurance agencies as insurance agencies," Mr. Orr said. He predicted that banks that embrace new distribution methods will become strong sellers of disability insurance but that those which focus on sales through branches will not.

Banks, with a trove of customers, clearly see disability insurance and long-term health care as major opportunities, said Ms. Jordan, the consultant.

The key to serving banks is to have dedicated support and seamless and integrated communications between the bank and Unum, Mr. Orr said. The company's three-month-old diversified marketing operations group is beginning to develop products and strategies for sales through banks.

David Stone, a Unum senior vice president who is spearheading the effort to tap new sales channels that was formally launched in October, said he is aiming for $150 million to $350 million of sales this year.

Banks, of course, aren't the only channel Mr. Stone is eying. He said Unum also works with affinity groups, such as teachers associations and church groups. One large black church, for instance, has many members who previously lacked access to disability insurance.

But company-run surveys have been encouraging about bank sales, he said. One survey covering people in a number of occupations found that many would prefer buying disability insurance through a bank. Worldwide, Mr. Stone said, the potential disability market that can be reached through banks is $1 billion to $2 billion of annual premiums.

Though Unum has a small amount of disability sales through banks, Mr. Stone said he believes that a tailored program would show results fast. One possibility, he said, is building a disability insurance feature into homeowner's insurance for an additional premium.

For such initiatives to succeed, Unum will have to develop simplified products to meet customer expectations, Mr. Orr said. "The consumer is king," he said, "and the consumer is going to demand more and more from the financial intermediaries.

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