Can I create a custom transactional e-mail for points balance expiry and other MageRewards things?
Yes you can!
The transactional e-mail templates that MageRewards sends will come up in your Magento transactional e-mail template management section unser the "Configuration" sub menu. When you are creating a new transactional e-mail template, look for the templates with the prefix "Rewards - " or "Rewards Referral". Once you've created your own template, you can apply this template in the configuration section of MageRewards. To update the points balance expiry email you simply need to go to the Points Balance Expiry section of the configuration and select the template you want to use. By default it will use the default one from your locale folder (usually en_US).
As with any email template that you setup in a dev environment in Magento. You will have to copy them over to the live server and/or copy of the settings to the live server.