* H1 operating profit 159 mln pounds vs 171 mln year earlier
* Value of new business down 24 pct to 65 million pounds
* Interim dividend unchanged at 7.05 pence a share
* Ups share buyback to 317 mln pounds from 261 mln pounds
* Shares down 0.8 pct, underperform FTSE 100 (Adds shares, analyst comment)
By Simon Jessop and Richa Naidu
LONDON, Aug 6 Insurer and pensions provider Friends Life Group posted a 7 percent drop in first-half operating profit on Wednesday as it grappled with recent changes to Britain's pensions and savings industry.
The government in its latest budget removed an obligation for people to buy an annuity, or income for life, at retirement.
That change led to a drop in the value of the company's new business, a term that refers to expected profits from new business net of the cost of the capital needed to underwrite that business, Friends Life said.
Its operating profit fell to 159 million pounds ($268.1 million) in the six months ended June 30 from 171 million pounds a year earlier, while the value of new business fell 24 percent to 65 million pounds.
Insurers have been racing to create new products to fill the gap. Friends Life said it was focusing on developing new products and expected the biggest area of growth to be around those that give consumers flexible access to their savings.
Eamonn Flanagan, an analyst at Shore Capital, kept his "hold" recommendation the stock, however.
"Friends Life's 2014 interim results were disappointing, in our view, highlighting the 'damage' done from the recent budget changes and confirming that the group is in a bit of a strategic bind," he said in a note to clients.
"Valiant efforts are being made to reposition the business but unfortunately we suspect that the best way forward is to re-join the run-off industry and sell its new business functions."
Created in 2008 by entrepreneur Clive Cowdery as Resolution, the company was known for buying up closed books of business from other insurers and using its scale to make costs savings in managing them as they gradually expire, or "run off", rather than writing new business itself.
Friends Life Chief Executive Andy Briggs said in a statement that while the industry had an opportunity to develop new products, the "final outcomes are not entirely clear at this stage".
The company said it was in a strong position to benefit from the industry changes, however, given the scale of its business with more than 2 million pension customers.
Adding to its reach in the first half of the year, it said it was benefiting from a government scheme to "auto-enroll" savers into workplace pension schemes, with 108,000 members added during the period.
At 0837 GMT, shares in Friends Life were down 0.9 percent, just lagging a nearly 0.7 percent fall in the broader FTSE 100 .
Not every analyst was negative. Barclays' Alan Devlin and Chris Roberts focused on the maintained interim dividend of 7.05 pence per share and the surprise increase in a planned share buyback to 317 million pounds from 261 million.
In a note to clients, they described Friends Life as a "very attractive income stock" that was nearing the point at which investors could expect an increase in the dividend.
"The combination of a higher-than-expected buyback and positive guidance on FY14 (full-year 2014) cash generation suggests the company will be close to or at its targeted coverage levels once the buyback is complete, potentially by the end of 2015," they said.
"Friends Life offers the sixth-highest dividend yield in the FTSE 100 of 6.5 percent, which we believe can grow from 2015, and we reiterate our overweight rating." ($1 = 0.5931 British Pounds) (Editing by Jane Merriman and Jane Baird)