LONDON (Reuters) - The reinsurance sector is vulnerable to a significant insured loss from the Atlantic storm season as their reserve capital has been used to offset low premiums, Fitch Ratings said, as Hurricane Earl threatens to hit land.

As Earl lingers as a category 3 storm off the east coast of the United States, Fitch Ratings told a reporters yesterday that insured losses from catastrophes in the first half, which were the highest on record, have already started to erode reinsurer's catastrophe budgets for the year.

The reinsurance sector needs a modest Atlantic hurricane season in order to prevent revisions to earnings guidance having to be made, Fitch said in its global reinsurance review.

Overall pricing had not been hit despite catastrophe losses from such events as the Chilean earthquake and European windstorm Xynthia in February, and the Deepwater Horizon spill in the Gulf of Mexico, but some businesses and regions have been affected, Fitch said.

Property catastrophe rates in Chile increased by 40 to 70 percent in response to earthquake losses in February, while for the sector as a whole, rate reductions were an average five to 10 percent.

"Abundant capacity — and even overcapacity — remains for many lines of business, and reinsurers' strong capital positions continue to provide a buffer that may allow rates to be cut further before economic profitability targets are compromised," said Fitch.

In addition to powerful Earl, the US National Hurricane Center is monitoring two other tropical systems in the Atlantic.

Hurricane Earl could make landfall somewhere between North Carolina and New England, and this will dictate whether it is a market changing event or not, said Chris Waterman, managing director in Fitch's Insurance rating group.

"I would expect a $30 to 40 billion loss (from a catastrophe) to have a material impact on the premium rating environment," he said. Premium ratings could also be affected by the new insurer solvency rules being introduced in 2013, which are expected to boost demand for reinsurance, said Fitch.

"Reinsurance capacity is an effective tool for managing capacity," said Waterman, adding that capital intensive business lines, such as credit insurance and non-proportional reinsurance lines could see premium rates rise.

As the reinsurance industry gears up for the reinsurance gathering in Monte Carlo next week, Fitch reaffirmed its stable outlook on the industry.

Waterman said it was unlikely the industry would be upgraded to a positive outlook, despite strong underwriting earnings and the sector's resilience though the course of the financial crisis.

"Should trends improve, a move to positive rating outlook is unlikely due to the ease with which capital can enter of leave the sector," he said.