Diplomacy Question: Faction elimination

I have a question regarding AI diplomacy. Does the AI weigh factors in their diplomacy decisions that include how many factions the player is at war with?

I think I've seen it mentioned before that if you are at peace too long with your neighbors, one of them will attack you regardless of the alliances you have because there is an AI factor regarding a long peace. If this is the case, is it more strategically sound to beat a faction back until they have one province left and then stop without destroying them? Would this affect AI diplomacy by maintaining a war against a basically impotent enemy?

Interesting question to which I really don't know except that eliminating a faction gives you a reputation hit I think.

In the forthcoming patch I hope much of the diplomacy will become more transparent and logical.

They do consider how many people you are at war with and whether they are allied with people at war with you.
Just make the enemy your vassal and you fix that ;)
[To do this, surround ALL their provinces with yours and then place about 5x their total army strength along or inside their borders. Then send a diplomat]

Unfortunately, smashing their army in the field does not a appear to be a valid way to get 5x their army strength; even if it works, they'll hate you

You have to do that at the start of a new round, this is when all those variables are calculated. So smash their army the turn before and then offer the next.
Protectorate can only be offered to factions at war and they do not consider relations.