I have seen it a few times myself. Its usually when you give the pope a couple of regions free and load him up with lots of cash. Give him like 100,000 florins and a couple free regions and see what happens. In my experience there is about a 5%-10% chance he'll start his own papal empire. Sometimes you have to give him more than 100,000 florin. Like give it to him a couple of times. It also helps if he's allied to you when you are at war.