As I understand it, from what Brad Wardell has said here on the forums and in the Discord chat, yes, the art is generated by AI, but the AI they are using is trained only the art produced by Stardock artists, in order to avoid any copyright claims. In the months since Supernova was released I've noticed the variety of portraits produced has improved, and I hope it will continue to do so.

Thanks! So when the game asks whether I would like for it to pick a picture, what it actually means is that it is generating pictures?

It is my understanding that the AI generated pictures are not generated the moment you make a custom civ. Instead the description is added to a queue for the system that generate the pictures. In the mean time it will provide you with a batch of 9 pictures (3 are random) that most closely matches what the civ you describe. Consequentially, it might be worth trying to make the same civ again later to see if new images have been generated.

Maybe there should be a request new images button for civs you wish to edit.

You just did.

The game also handles this(sending request), auto. When you search and search, there is a limit. "More pictures" and "more like this picture" eventually runs out of rolls(I estimate there are like 20-30 rolls per). So if you run out of rolls and didn't find something, probably is when it sends a request. To my understanding, the pics are already pre-generated, but hosted in Stardock's cloud or something, so you can't see them(like you know how they get a logo from the logo area but you can see which those are if you edit? Same principle.)

However you can tell a lot are AI generated, and some artist just refined them, or evaluated their usage(sometimes some bits remain, but there's so many and some are trully awesome, so it's negligible that some are a bit off and can be used anyway as flavor and minor civ gfx). There are categories of civ leaders now that weren't there before. But with the limitations, you might not come up with a pic you run into a second time soon. So if you find one you like save that and you can change the civ details later.

Also, the ACGPT algorithm seems off lately, generating less relevant pics, maybe due to the increased amount of pics? I asked for a creature and it gave me pics of anything but and loads robots. Then I asked for robot and it gave loads of creatures. I do expect they'll get hold of and fix it by release date, but there is still like what, 20 days for that?