Bermuda property-catastrophe reinsurer PXRe has seen one-third of its clients cut ties with the company after its business prospects were last month called into question after larger than expected losses from last year?s hurricanes.

And the group also said in a recent regulatory filing that it has begun to downsize operations and has contracted to sub-let part of its office space in Edison, New Jersey to the Lincoln National Life Insurance Company.

PXRe said in the Securities and Exchange Commission filing that it expects the customer exodus to grow. The blow to its business comes on the heels of the reinsurer last month being hit by a crippling ratings downgrade as it posted double the losses it expected from 2005 storms.

The company issued its business update in a recent regulatory filing. The announcement comes after PXRe?s February 17 announcement that it hired investment bank Lazard to advise it on ?strategic alternatives?.

In total, PXRe last year suffered a $704.6 million loss. PXRe?s loss surprised many, including the rating agencies, because it was double an earlier estimate of what the company expected to pay out to cover claims arising from last year?s hurricanes.

A.M. Best Co., Standard & Poor?s and Moody?s Investor Services all cut PXRe?s ratings down to the ?B? range after the announcement, calling into question the company?s ability to continue business as normal.

PXRe said 75 percent of its insurance contracts contain clauses giving the insured the right to make demands on the company if there was a decline in the reinsurer?s rating or capital. And as of March 13, one-third of the reinsurer?s clients had said they were cancelling contracts. ?It is anticipated that this percentage will increase,? the company said, in the filing.

Many insurance buyers have the option to cancel their policies if the reinsurers? financial strength rating falls. Ratings, a measure of a reinsurer?s ability to pay claims, are closely watched by customers who want to be sure any losses they have laid off to the reinsurer can be met.

PXRe is largely owned by hedge funds including stakes held by D.E. Shaw & Co., Eton Park Capital, Capital Z Partners, Ltd. and Och-Ziff Management, according to PXRe?s proxy statement, sent to shareholders ahead of the company?s May 9 annual general meeting. Senior management hold less than one percent of the company?s shares, according to 2005 data.

Also in its proxy filing, PXRe said it is having to pay $750,000 to its ex-chief financial officer as part of a non-competition agreement reached between the two parties, John Modin, who had been CFO, quit the company on January 6 for unexplained reasons. His payment from PXRe is equal to two times the base salary he was paid as chief financial officer.