UPDATE 2-AIG operating results beat expectations

* 4th quarter loss $4 bln, or $2.68 per share

* Includes $4.4 bln ILFC loss, $1.3 bln in Sandy losses

* Operating EPS of 20 cents beats expectations

* Shares rise after-hours trading

Feb 21 (Reuters) - Insurer American International Group Inc reported fourth-quarter results that beat Wall Street expectations, although Chief Executive Robert Benmosche said some employee bonuses will be smaller this year because the company did not meet all of its performance targets.

Overall, the company reported a $4 billion loss on Thursday, due mainly to the sale of aircraft leasing business ILFC, as well as losses incurred from Superstorm Sandy.

But AIG's underlying business trends - with higher investment income across two key insurance units and stronger underwriting margins in its property and casualty business - helped lift operating earnings above what analysts expected.

Last year marked an important milestone for AIG, which was rescued by U.S. taxpayers in 2008 with a bailout that eventually exceeded $180 billion. The U.S. government, which took a stake in the insurer in exchange for the bailout, exited nearly its entire investment in the company in 2012.

The Treasury Department still holds warrants to purchase about 2.7 million shares, but sold the remainder of its common stock last quarter. The Federal Reserve also sold off its holdings in an AIG-bailout related vehicle in 2012.

The bailout exit lifted some uncertainty for investors and AIG replaced Apple Inc in the fourth quarter as the hedge fund industry's favorite stock.

AIG came under enormous public pressure to slash bonuses while taxpayers were supporting the company. As recently as last month, the watchdog office of the Treasury Department's bailout program said the agency had approved excessive pay for executives at bailed-out companies - including AIG - even in 2012.

In a memo to employees, Benmosche called the fourth quarter a "historic" one for the company, but also said some bonuses will be smaller this year because of weak performance.

"We still have work to do, and we didn't meet all our business goals in 2012, which will mean some short-term incentive pools will be smaller this year than last year," he said.

Overall, AIG posted a net loss of $4 billion, or $2.68 per share, for the period, compared with a year-earlier profit of $21.5 billion, or $11.31 per share.

On an operating basis, the company earned $290 million, or 20 cents per share. The company recorded after-tax losses of $1.3 billion in the quarter from Superstorm Sandy.

Analysts polled by Thomson Reuters I/B/E/S on average expected a loss of 8 cents per share in the quarter.

AIG shares were up about 4 percent in after-hours trading from the 37.28 close.