Be sure to select the correct sub type, the example above is for a Gato class.
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Not for TMO 1.9 or 2.0. All conning towers except the S boats natively support emblems and kill flags. All you need to do is add your own texture. No positioning or crafty graphic editing required of the sub's skin textures.
See the sample emblem in the documentation directory for an example.
One subsim user, made these tutorials for making your own: