After playing around for a few mins I found that CCBlobbylize will do it. I have to assume your using AE6.5 other then that you could buy the plugin. I could send you my project set up for it if your intrested?
But yeah, Since water isn’t really a texture it’s just the refraction of an image you have to composite your background prior to the text drop in. Then I would recommend doing a poxy or a final render of the BG with out the words.
Drag your background into a new timeline. Duplicate it. Then create a text layer. Use a pure colour (RED / GREEN / BLUE) and type something in. (The order stack is this 1 – Text : 2 – Bg layer : 3 Bg Layer Dupe). Now Go to the middle bg layer (this is the one you want to distort so we’ll be applying CCBlobby to that) Effects > Distort > CCBlobbylize. Then go to it’s effects paramaters .. Blobbiness > Bloblayer (select your text layer for that). Now, slecy property make sure it’s the colour you selected for the font. And turn off your Layer 1 so you can see what’s it’s doing, Now it should look like water. Adjusting the softness blends in the words to make it all join and cut away eats away at the word like it’s soaking into the paper (would need a seperate animation so the paper actually looked like it got wet to sell that one :P). Other then that, Light and Shading should be easy to guess … you can turn on layer 1 [text layer] for a reference ..
The only thing it’s lacking is well, after shocks, like wobbles but I’m guessing you could use the warp distort to give it a nice waking look and wobble. Other then that I’m not really sure 6.0 can do it with out a lot of work .. but it’s not to complex to do by hand .. Good luck hope that helped .. and if you need the file let me know, I can put it online.