If I step on a few ants, am I insane? There's a difference between "evil" and "insane"...
Yes, but take a good look at Sephiroth's character before and during the Nibelheim incident. He was calm, composed, possibly arrogant?
Less than an hour later: he's destroying the town, raving about freeing his "mother" and other such nonsense.

If that's not insane, I don't know what is.