NEW YORK (Bloomberg) - Marsh & McLennan Cos., the world's largest insurance broker, said third-quarter profit rose on the sale of its Putnam Investments unit. Earnings from its flagship business fell to the lowest since 2005 as expenses climbed.

Net income jumped to $1.95 billion, or $3.60 a share, from $176 million, or 31 cents, a year earlier, the New York-based brokerage said in a statement today. Excluding items such as Putnam, profit was 23 cents a share, less than the 32-cent estimate of William Wilt, an analyst at Morgan Stanley.

Chief Executive Officer Michael Cherkasky's brokerage business is still underperforming rivals Aon Corp. and Willis Group Holdings Ltd. in revenue growth. He fired the deputy that ran the division, Brian Storms, in September as the executive's spending on computer systems and a new advertising campaign outpaced sales, pushing profit to the lowest since 2005.

"The magnitude of the disappointment is far worse than we or investors had even thought possible," said David Small, an analyst with Bear Stearns Cos. in New York, in a research note. He rates the shares "peer perform."

Mr. Cherkasky, 57, called the brokerage results "unacceptable" and pledged to reduce advertising and slow the pace of computer system changes. He's now running the unit directly as he seeks to restore profit and revenue wiped out by a 2004 New York State collusion probe that forced the firm to give up payments from insurers.

"We had to change the business model," Mr. Cherkasky said in an interview yesterday. "That was hard to do, and we haven't, and I thought we were doing it, and it turns out we were not doing it as well as we had hoped. So that's on my watch, and it's my responsibility for picking the leader who gets it done, and now I need to step in there and get it back on track."

Pretax profit in the insurance and reinsurance brokerage segment fell 55 percent to $65 million, the lowest since the fourth quarter of 2005, on higher bonus pools for brokers and spending on the ad campaign that Storms started in April. The firm set aside $13 million for Storms' severance after he was fired on September 14, the company said.

Mr. Cherkasky said he approved higher broker bonuses than were called for by the division's new incentive pay system, adding to the increased expenses. His alternative was to risk employees quitting for competitors, he said.

"The franchise depends on us keeping the people," he said in the interview.

Revenue at the brokerage businesses rose 5.6 percent to $1.34 billion, helped by gains in a division that makes private equity investments.

Excluding the effect of currency fluctuations and acquisitions, revenue at the unit climbed two percent, compared with a three percent increase at Chicago-based Aon and the four percent boost at London-based Willis on that basis in the quarter.

Pretax profit at the division that comprises the Mercer and Oliver Wyman consulting firms rose 32 percent to $148 million.

It dropped 16 percent to $31 million at the Kroll security and investigation business. Consolidated revenue rose 10.3 percent to $2.79 billion.

Marsh & McLennan said in August it would buy back $1.5 billion of stock after reaping $2.5 billion after taxes from the $3.9 billion sale of Putnam to Montreal's Power Financial Corp. Cherkasky put the mutual-fund unit on the auction block in 2006 after assets plunged 60 percent in five years, hurt by poor returns and a trading scandal. Power, the biggest Canadian mutual-fund company, won a foothold in the $10.4 trillion US mutual-fund market.

Cherkasky took charge of Marsh & McLennan in 2004, amid the probe by Eliot Spitzer, then-New York attorney general, into bid-rigging in insurance sales.

He settled with Spitzer in 2005, agreeing to pay $850 million to clients and to stop accepting payments from insurers that Spitzer labeled "kickbacks." The company neither admitted nor denied wrongdoing.

Since the January 31, 2005, settlement, Marsh & McLennan shares lagged behind Aon and Willis, as the scandal scattered clients and wiped out about $845 million in annual revenue.

Marsh & McLennan shares dropped 25 percent, compared with a 4.6 percent increase at third-ranked Willis and a 101 percent gain at No. 2 Aon.

Marsh & McLennan shares rose 32 cents, or 1.3 percent, to $24.52 in New York Stock Exchange composite trading yesterday.

The company also faces a new collusion probe, from Connecticut Attorney General Richard Blumenthal.

He sued the company's Guy Carpenter reinsurance brokerage last month, accusing it of fixing prices. Guy Carpenter said the suit is baseless.

Marsh & McLennan had the most 2006 revenue from broking and consulting, more than Aon and Willis, according to Business Insurance magazine.