Annuity sales drop hits Standard Life profits, shares fall

* H1 operating pretax profit up 6 pct, annuity sales down

* Keith Skeoch takes over from David Nish as CEO Wednesday

* Skeoch will continue to run Standard Life (LSE: SL.L - news) 's investment arm

* Skeoch says markets to remain volatile (Adds CEO, analyst comments, background, share price)

LONDON, Aug 4 (Reuters) - A drop in sales of fixed-rate annuities dented first-half profits at British insurer and asset manager Standard Life on Tuesday, sending the firm's shares down nearly 3 percent.

British life insurers have been looking for new sources of business after reforms this year removed the requirement for retirees to use their pension pots to buy a fixed-rate annuity.

Standard Life reported a 39 million pound ($61 million)reduction in its margin from "spread/risk" business such as annuities in the six months to June 30 compared with the previous year.

This was due both to lower annuity sales and a drop in asset liability management -- in which insurers match assets more closely to liabilities, often using derivatives.

Standard Life has been switching focus to "fee-based" business such as more flexible drawdown pensions and its asset management arm.

"Fee business continues to drive performance -- 95 percent of our income is coming from fee-based propositions," outgoing chief executive David Nish told reporters on a conference call.

Standard Life said it expected annuity new business to drop by 10-15 million pounds this year and asset liability management to drop by 30-40 million pounds compared to 2014.

Keith Skeoch, chief executive of Standard Life Investments, will take over from Nish as group chief executive on Wednesday.

Skeoch told reporters he would also continue to run the group's fund management arm "for the foreseeable future".

Standard Life's operating pretax profit from continuing operations rose 6 percent to 290 million pounds in its fiscal first half.

Barrie Cornes, analyst at Panmure Gordon, said the profit figures were in line with his expectations but "the shares are fully valued at the current level", reiterating his "hold" recommendation on the stock.

Standard Life's shares fell 2.6 percent to 442 pence at 0747 GMT, underperforming European insurance stocks, which were down 0.12 percent.

The firm's assets under administration rose 2 percent from December 2014 to 302.1 billion pounds, in volatile markets.

"Markets are difficult, equity markets are fully up with the price, there's nervousness about rising interest rates, about the pace of growth, the impact of commodities in China," Skeoch said. "I suspect the market volatility we have seen is going to continue."

The insurer said it would pay a dividend of 6.02 pence per share, up 7.5 percent.

($1 = 0.6405 pounds) (Reporting by Carolyn Cohn; Editing by Sinead Cruise and Mark Potter)