I must say the AI surprised me in my last game. I had a horrible start but was making a comeback. I had all but defeated one faction that had declared war on me, and I was starting to feel confident. However, a second faction hit me where it hurt with a big stack and followed up with its Sovereign’s killer stack. Faction 2’s troops were better than mine, and its offensive was effective.
I don’t doubt one of our resident experts could have gotten out of it, but it was more than I could handle.
Right there with you. AI on normal and challenging has actually outsmarted me from time to time, slipping armies through areas that I thought were defended and grabbing cities I thought were safe. It even pulled this off once by staging a very effecting diversion elsewhere. Every time it managed it because I made a mistake or wasn't paying enough attention, but it was smart enough in every case to take advantage of that.
What it doesn't seem to do well - something I remember GalCiv's AI had trouble with too - is react to changing circumstances, even when it brings about the change itself. For example, in one recent game I declared was on Altar to help my ally Magnar. Relias' forces kept conquered Magnar cities, while I rolled up behind them and conquered both these same cities and Altar's own undefended settlements - I took a good four or five cities over several seasons before Altar's priorities shifted. In another game, my sort-of-ally Yithril suddenly declared war on me and could have grabbed several of my best cities with stacks of juggernauts he had all over my territory (ostensibly on their way to fight the much weaker Pariden), but instead carried on fighting his other wars and trying to conquer the wildlands - giving me the few extra turns I needed to muster a defence and hammer his armies with strategic spells, the only ready defence I had against juggernauts.
It has also seemingly lost some abilities it had in Beta, like casting city curses, unless I've been very lucky in my recent wars.
On topic: I play in lots of small sessions and while I have noticed the bug, it hasn't been game-breaking for me yet.