Kingsway Financial Services Inc. (TSX:KFS) took a "tepid step in the right direction" by freezing salaries and cutting 162 jobs to lower costs, says an activist shareholder that's pushing for major changes at the insurance giant.

The Toronto-based insurer said Wednesday the latest moves will help save about US$20 million in operating costs next year.

Kingsway, which reports in U.S. dollars, said it plans more expense cuts in early January. Combined with higher prices for its insurance, the company expects to trim its underwriting losses.

The firm has come under fire from New York-based money management firm Stilwell Group, which is demanding $50 million in overhead cuts, the sale of non-core businesses and debt repayment.

Joe Stilwell, the managing member of Stilwell Group, said Wednesday that he's still not fully satisfied with the latest changes.

"The announcement was devoid of any mention of repurchasing any public securities that trade at a substantial discount," Stilwell said in an interview from New York.

Still he said "this is a tepid step in the right direction."

Kingsway "needs to hunker down, make their balance sheet as conservative as possible," he added.

"They need to focus on whatever they conceive their core businesses to be, and get rid of all the peripheral businesses and lines."

Shaun Jackson, president and CEO, said the latest cuts reflect the beleaguered company's business and strategic planning process aimed at reversing recent losses in a tough business environment.

"The board has now approved management's initial recommendations, including actions to lower costs by approximately $20 million," Jackson said in a release.

"These include reducing headcount, freezing salaries and eliminating bonuses except for exceptional performance, and reducing corporate overhead."

Earlier this fall, Stilwell Group called for the removal of Jackson and Michael Walsh, the board's non-executive chairman, from the nine-member board to be replaced with its own nominees, New York-based Spencer Schneider and Larry Swets Jr. of Chicago.

Stilwell Group owns 4.6 million shares or nearly 8.4 per cent of Kingsway, one of North America's largest insurers of truck drivers and of automobile drivers who can't obtain standard coverage.

Kingsway's shares, which were at about $17 a year ago, closed Tuesday at $5.36 on the Toronto Stock Exchange. A major technical problem halted trading on Toronto Stock Exchange all day Wednesday.

On the New York Stock Exchange, Kingsway shares rose 31 cents to US$4.86, a gain of 6.8 per cent.

In Wednesday's cost cutting announcement, Kingsway said it will merge the operations of four of its U.S. subsidiaries. The mergers, plus consolidation of the company's two offices in Montreal and other streamlining moves will cut 162 jobs, saving US$8 million.

The firm will also freeze salaries of all employees effective immediately, impose a hiring freeze and put the executive incentive compensation plan on hold. Subsidiaries that have produced positive underwriting results or employees with exceptional performance will still be rewarded. Those moves will save about $7.8 million in 2009.

Kingway will also cut corporate overhead expenses, including marketing and promotion, and information technology, to save another $4.2 million.

"While taking decisive actions to reduce our expense and claims ratios and terminate unprofitable non-core business, we will continue to implement, as appropriate, further rate increases on all lines of business as we have in 2008 and expect hardening markets to make this possible," Jackson said.

"The combination of reducing costs, eliminating unprofitable business and increasing rates will contribute to overall profitability and returns for shareholders."

The company, which has been already selling non-core businesses and getting out of unprofitable insurance lines, reported in early November a net loss of US$17.4 million or 32 cents a share for the third quarter ended Sept. 30.

That compared with net profits of US$23.6 million or 42 cents a share for the same period last year _ a far better time for the insurance sector.

Kingsway also posted a $50.6 million loss on its core insurance underwriting operations for the third quarter, more than five times last year's figure.

The company employs 2,900 people and operates through subsidiaries such as Kingsway General, Jevco, Universal Casualty, American Service, Southern United Fire and Lincoln General. It also operates reinsurance subsidiaries in Barbados and Bermuda.

Revenues from insurance premiums fell 26 per cent to US$354.5 million from $477.5 million for the third quarter.

In its earnings report, Kingsway management said the poor showing reflected disappointing underwriting results and net realized losses, including the writedown of investments.