UPDATE 3-Allianz kick-starts insurance CoCo bond market

Allianz on Tuesday kick-started the market for insurance "CoCo bonds", selling debt securities that will convert into shares if Europe's biggest insurer hits trouble.

Allianz is selling 500 million euros ($724 million) of contingent convertible notes (CoCos) to Japan's Nippon Life, both companies said in a statement, amid signs more insurers will test the new asset class.

Within 10 years of issuance and under certain, as yet undisclosed, conditions the notes will automatically convert into Allianz common stock.

CoCos issued by banks usually convert into equity under certain conditions, such as when an issuer's capital ratio falls below a trigger point, protecting taxpayers in case of failure.

Allianz's CoCo bond will boost its solvency ratio in case of a crisis, and analysts expect peers to develop a taste for the new securities, although it remains unclear how they will be classified under the new Solvency II insurance rules.

"Others will follow suit," WestLB analyst Andreas Schaefer said, adding he can imagine CoCos being placed on capital markets as well as with private investors.

Commerzbank analyst Roland Pfaender agreed. "The placement will prepare markets for the next emission, which may be placed with a broader scope of investors," he said.

A source close to another big German insurer said it is planning to soon discuss with its banks whether it makes sense for it to issue a CoCo.

This year, Swiss Re Chief Financial Officer George Quinn said in a Reuters interview: "I think we'd like to be in this market, definitely as an issuer. But it's a matter of structure, price."

Insurers hold large amounts of capital to cover possible claims, but the capital is very expensive. CoCos might be a good alternative to traditional forms of capital that insurers raise to cover insured risks, Quinn said at the time.

Until now, the CoCo bond market has seen Swiss banks Credit Suisse as an issuer, which according to the country's new bank rules has to hold 10 percent in equity and a further 9 percent in other capital such as CoCo bonds.

UK bank Lloyds and Netherlands-based Rabobank have also issued the bonds.

OVERSEAS PUSH

For privately held Nippon Life, Japan's largest life insurer by assets, the purchase of the 30-year convertible subordinated notes is another overseas push to compensate for shrinkage in its traditional life insurance market.

In March, it agreed to pay $680 million for a 26 percent stake in India's Reliance Life Insurance, and in 2009 it invested $500 million in a unit of U.S.-based Prudential Financial .

A declining population has led Japan's insurers to look outside their home market for revenue streams, with rival Dai-ichi Life becoming a public company in 2010 to accelerate its overseas expansion through acquisitions.

Nippon Life has the option to receive common stock issued by Allianz within 10 years after issuance.

($1=.6907 Euro) (Additional reporting by Junko Fujita in Tokyo, Alexander Huebner in Frankfurt; Editing by David Hulmes)